Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robe

Question

Stephenson Real Estate Company was founded 25 years ago by the current CEO, Robert Stephenson. The company purchases real estate, including land and buildings, and rents 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 averse to debt financing. As a result, the company is entirely equity financed, with 9 million shares of common stock outstanding. The stock currently trades at $37.80 per share. Which method of financing maximizes the per-share stock price of Stephenson’s equity?

Explanation / Answer

The famous two methds of financing are equity financing and debt financing, so if we chose debt financing it will reduce taxable income as interest payment of debts are tax deductble hence creating tax shield, which in turn wil increase value of firm, which means maximizing the per-share stock price of Stephenson’s equity. Hence Debt financing is the method which must be choosen.

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