- Ohio Real Estate (ORE) of the United States is a real estate development company founded 20 years ago by the current CEO, Johnson.  ORE is in the business of purchasing real estate such as land and buildings and leasing them to lessees.  Since ORE has been making profits every year for the past 10 years, shareholders trust the management.  The CEO was the founder of the Illinois farm business, a farm developer that had gone bankrupt in the past. The failure of the business caused Johnson to avoid debt financing.  Currently, ORE is a company that operates only with full equity capital with 9 million common shares issued.  The current ORE share price is $42.50.

- Johnson plans to purchase land in the western United States for $45 million and lease it to local farmers.  ORE permanently expects an annual pre-tax operating profit of $12 million from the land purchase.  The project is led by CFO Lee.  Lee estimates the firm's current cost of capital to be 12.5%.  Lee expects the value to increase when debt is included in a company's capital structure.  As a result, we are contemplating whether all the capital required for the project was raised through debt issuance.

- Lee believes that it is possible to present a coupon rate of 8% when issuing bonds.  Also, Lee believes that the ratio of equity to debt is 7:3 in the case of an appropriate capital structure.  In other words, if Lee spends more than 30% of debt, financial distress will rise sharply, resulting in a lower bond rating and higher coupon rate.  For reference, ORE's corporate tax rate is 40%.

 Assignment that replaces Final exam for Financial Mgt by Ji-Yong Seo (Prof. in Div. of Business Administration)

1) When preparing the balance sheet based on the market value of ORE before the announcement of the land purchase, what are the total assets, equity capital, and liabilities, respectively? (5 points)

2) Considering the case where ORE raises funds only through stock issuance to purchase land, what is the NPV (net present value) of the project?  (5 points)

3) In relation to the problem in 2) above, if ORE announces that it will finance the land purchase using only equity capital for the rental business, the market value of ORE reflecting the performance of the rental business after the land purchase is  How much is it?