Stephenson Real estate RecapitalizationStephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, andrents the property to tenants. The company has shown a profit every year for the past 18 years, and the shareholders are satisfied with the company’s management.Prior to founding Stephenson Real Estate, Robert was the founder and CEO of a failed alpaca farming operation. The resulting bankruptcy made him extremely averseto debt financing. As a result, the company is entirely equity financed, with 15 million shares of common stock outstanding. The stock currently trades at $41.50per share.Stephenson is evaluating a plan to purchase a huge tract of land in the southern United States for $70 million. The land will subsequently be leased to tenantfarmers. This purchase is expected to increase Stephenson’s annual pretax earnings by $18 million in perpetuity. Kim Weyand, the company’s new CFO, has been put incharge of the project. Kim has determined that the company’s current cost of capital is 12.5 percent. She feels that the company would be more valuable if itincluded debt in its capital structure, so she is evaluating whether the company should issue debt to entirely finance the project. Based on some conversationswith investment banks, she thinks that the company can issue bonds at par value with an 8 percent coupon rate. Based on her analysis, she also believes that acapital structure in the range of 70 percent equity/30 percent debt would be optimal. If the company goes beyond 30 percent debt, its bonds would carry a lowerrating and a much higher coupon because the possibility of financial distress and the associated costs would rise sharply. Stephenson has a 40 percent corporatetax rate (state and federal).1. If Stephenson wishes to maximize its total market value, would you recommend that it issue debt or equity to finance the land purchase? Explain.2. Construct Stephenson’s market value balance sheet before it announces the purchase.Market Value Balance SheetAssetsEquityTotal assetsDebt &Equity3. Suppose Stephenson decides to issue equity to finance the purchase.a. What is the net present value (NPV) of the project? (Hint: Calculate the after-tax increase in earnings as a result of the land purchase as a perpetuity.)b. Construct Stephenson’s market value balance sheet after it announces the purchasewill be financed with equity. (Hint: The market value of equity increases by themarket value or NPV of the land purchase.)Market Value Balance SheetOld assetsNPV of project EquityTotal assetsDebt &EquityWhat would be the new price per share of the firm’s stock?How many shares will Stephenson need to issue in order to finance the issue?c. Construct Stephenson’s market value balance sheet after the equity issue, butbefore the purchase has been made.Market Value Balance SheetCashOld assetsNPV of project EquityTotal assets Debt &EquityHow many shares of common stock does Stephenson have outstanding after thenew equity issue?What is the price per share of the firm’s stock?d. Construct Stephenson’s market value balance sheet after the purchase has beenmade.Market Value Balance SheetOld assetsPV of project EquityTotal assets Debt &Equity4. Suppose Stephenson decides to issue debt to finance the purchase.a. What will the market value of the Stephenson company be if the purchase isfinanced with debt? (Hint: VL = VU + tCB.)b. Construct Stephenson’s market value balance sheet after both the debt issue and the land purchase. What is the price per share of the firm’s stock after thedebt issue?Market Value Balance SheetValue unlevered DebtTax shield EquityTotal assets Debt &Equity5. Which method of financing maximizes the per-share stock price of Stephenson’s equity? Explain.