Hoosier Rentals Inc. Harvard Case Solution & Analysis

1- If HR would like to maximize its total market value, should it issue debt or equity to pay for the shopping complex? Briefly explain.

In order to maximize the market value of the company,it should pay for the shopping complex with the mix of equity and debt financing. Debt is the cheapest source of financing as we have seen in the case the cost of equity is 15%, however the cost of debt is 7%. Through the debt financing, the company will also save the tax if the debt is tax deductible, which will also prove to be significant in increasing the value of the company through saving the tax. The capital structure of the company also has an effecton the market value of the company. Higher level of debt in the company makes the company more risky because if the company fails to pay the interest expenses and principal payments, then the company can go into the liquidation.

2- How does the market value balance sheet of HR look like before the firm makes the announcement on the shopping complex project? Explain and construct the market value balance sheet.

The market value of the balance sheet before the announcement of HR of shopping complex project will be the total value of per share into the shares outstanding because there is currently no debt in the company and it is wholly equity owned. The current market value of the balance sheet is $16.250 million.
3- What is the net present value of the shopping complex project, assuming that HR issues equity (i.e. stock) to finance it?

The NPV of the project assuming that the HR issues equity to finance it is $22 million. The NPV is calculated by assuming the growth rate or inflation rate of 3% annually. The income of the company per year is $4.2 million and the initial investment is $12.325 million. The cost of capital taken is 15%, which is the current cost of capital of the company when the company is wholly equity owned. The terminal value is calculated by the dividend growth model with growth rate of 3%.
4- How will HR’s market value balance sheet look like after the firm makes announcement on the shopping complex project which will be financed by equity? Explain and construct the market value balance sheet.

The market value of the balance sheet will increase by purchasing the complex.The total assets of the company will increase by the amount of the market value of the complex, and due to the equity financing, the equity of the company will also increase by the same amount which will balance the sheet. The value of the complex is $12.352 million and the equity will increase by the same amount....................

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