Solved by verified expert:Please see attached. Need the work to be show on excel and a 300 word memo on the two bullet points. Thanks
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The purpose of this assignment is to demonstrate to students how the issuance of debt to purchase
outstanding common stock could affect the value of the company’s equity and redefine the capital
structure. The problem will also allow students to explore the effect of corporate taxes through debt
financing.
Assignment Steps
Resources: Corporate Finance
Scenario: Hightower, Inc. plans to announce it will issue $2.0 million of perpetual debt and use the
proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 5%. Hightower,
Inc. is currently an all-equity company worth $7.5 million with 400,000 shares of common stock
outstanding. After the sale of the bonds, the company will maintain the new capital structure
indefinitely. The company currently generates annual pretax earnings of $1.5 million. This level of
earnings is expected to remain constant in perpetuity. The tax rate is 35%.
Prepare a 300-word memo advising the management of Hightower, Inc. on the financial impact,
including the following:
•
What is the required return on the company’s equity after the restructuring?
•
Discuss the advantages and disadvantages of debt financing over equity financing. CASEY
Show all calculations and submit with your memo.
Format your paper consistent with APA guidelines.
Click the Assignment Files tab to submit your assignment.
Note: Grades are awarded based upon individual contributions to the Learning Team assignment. Each
Learning Team member receives a grade based upon his/her contributions to the team assignment. Not
all students may receive the same grade for the team assignment.
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