Effect of Debt Issuance on Stock Valuation Memo

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 200-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? – Carolina 

IMPORTANT Show all calculations (Excel) and submit with your memo (200 words minimum per team member). 

Effect of Debt Issuance on Stock Valuation Memo

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 200-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? – Carolina

IMPORTANT
Show all calculations (Excel) and submit with your memo (200 words minimum per team member). 

MEMO

To:

From:

Date:

Subject:

Good afternoon, XXXXX,

Opening: this is a chance to diffuse tension and set the tone for the memo. Kindly and very briefly state the point of the memo.

Summary: the summary is the body. Here you will present FACTS, not opinions, to allow the read to make an informed decision.

Closing: the final remarks are a call to action. Invite the reader to contact you with any further questions.

Signature

Title

Contact info(can be fake for class)