Documente Academic
Documente Profesional
Documente Cultură
Question No. 1
If Stephenson wishes to maximize its total market value then I would recommend to issue debt finance for land purchase.
As dividend paid to equity holders are not tax deductible where as interest are tax deductible and would decrease the
taxable income for Stephenson, it would decrease its tax liability adding up to the overall value of the firm. Further
Stephenson is unlevered currently and adding debt portion to its structure wouldn't increase the cost of debt dramatically
so it would be a cheaper source of finance as well.
Question No. 2
If Stephenson decides to issue equity to finance the project then the NPV Of the project is
VL = VU + D X T
Question No. 5
If Stephenson uses equity to finance the project,
Stock Price would be 49.53
Hence, debt financing is instrumental in increasing the stock price of Stephenson’s equity.