Effect of Debt Issuance on Stock Valuation Memo FINAL...

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Memo To: Management, Hightower, Inc. From: Team C (Florence Allen, Kimberly Ards, LaToya Grant-Buckson, Travis Jones) cc: Instructor Kimberly McCarrolle Date: March 7, 2017 Re: Financial Impact The purpose of this memo is to advise management on the financial impact of the company. The memo will include the expected return on the company's equity before the announcement of the debt issue, the company's market value balance sheet before the announcement of the debt issue, the price per share of the firm's equity, the company's market value balance sheet immediately after the announcement of the debt issue, the company's stock price per share immediately after the repurchase announcement, shares the company repurchase as a result of the debt issue, shares of common stock will remain after the repurchase, and the required return on the company's equity after the restructuring. It will also explain the advantages and disadvantages of debt financing over equity financing. The expected return on equity for a firm refers to the ration of annual after tax earnings to the market value of the firm’s equity. The amount the firm must pay each year will be; in the case of Hightower Inc., the expected return on the company’s equity is 13%. The taxes totaled $525,000. Therefore, the return on equity (R0) equals $1,500,000 - $525,000 divided by $7,500,000 which equals 0.13 or 13%. Hightower Inc. price per share is $27.50 and their pre- debt announcement balance sheet is listed below. Balance sheet before the announcement of debt issue is shareholder’s equity $0, equity $7.5 million, earnings $1.5 million, and total shareholder’s equity $9.0 million. The company’s stock price is $11,000,000 divided by 400,000 which equals $27.50.

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