1. Issue debt or equity to finance the land purchase
Stephenson should issue debt as the interest payments are tax deductible and thereby decrease the taxable income. Debt also provides a tax shield which will increase the value of the firm. If he chooses to finance with equity, the earnings would have to be divided amongst more number of shareholders. Thus value of firm will go down.
2. Stephenson's market value balance sheet before it announces the purchase
Market value = No of shares * Market price of share before announcement
= 8 million * $37.8 = $302.40 million
3. Stephenson decides to issue equity to finance the purchase
No of new shares to be issued = Investment / Market price of share
= $85 million / $37.8 = 2,248,677 shares (rounded off)
4. NPV of the project
Investment = $85,000,000
Annual income = $14,125,000
Earnings After Tax = Annual Income * (1 - Tax rate)
= $14,125,000 * (1 – 0.23) = $10,876,250
PV of Earnings After Tax = Earnings After Tax / Cost of capital
= $10,876,250 / 0.102 = $106,629,901.96
NPV = -$85,000,000 + $106,629,901.96 = $21,629,901.96
Net Present value of the project is $21,629,901.96
Note: As per HOMEWORKLIB POLICY, in case of multiple sub questions, the first 4 need to be answered
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