Effect Of Debt Issuance On Stock Valuation

Effect of Debt Issuance on Stock ValuationNameCourseTutor’s NameDateThe expected return on the company's equity before the announcement of the debt issueA firm’s expected return on equity is the earnings after interest and tax that can be attributed to equity. Before the share repurchase, Hightower Inc. is an all equity firm; therefore it makes no interest payments. Thus, the expected return on equity is theentire after tax profit. Given the company’s pre-tax earnings is $1.5 million, Equity market value is$7.5 million and the tax rate is 35%.The expected return on the company's equity is calculated as below $Pre Tax Earnings 1,500,000 Tax @ 35% 525,000 After Tax Earnings 975,000 Value of Equity 7,500,000 Expected Return%13%As calculated theexpected return onHightower Inc. equity is 13%The company's market value balance sheet before the announcement of the debt issue and the price per share of the firm's equityHightower Inc. is an all equity firm; therefore the market value of the equity is equal to the company’s assets (Drake && Fabozzi, 2008). The market value balance sheet before the announcement of the debt issue is as