ModMill Real Estate Company is an all-equity firm with 15 million shares of common stock outstanding worth $32.50 per share. ModMill is planning to purchase a huge track of land in southeastern Texas for $100 million. The land will subsequently be leased to tenant farmers, increasing ModMil's annual expected pre-tax earnings by $25 million in perpetuity. The firm's unlevered cost of equity capital is 12.5%. ModMill is subject to a corporate tax rate of 40%. If it were to issue debt, the interest rate on ModMill's bonds would be 8% per annum. Assume that the market is semi-strong form efficient.

(a) Suppose ModMill decides to issue equity in order to finance the purchase.

(i) What is the net present value of the project?

(ii) ModMill has just announced that the firm will finance the purchase using equity. What is the new price per share of the firm's stock? How many shares will ModMill need to issue in order to finance the purchase?

(b) Suppose ModMill decides to issue debt in order to finance the purchase.

(i) What will the market value of ModMill be if the purchase is financed with debt?

(ii) What is the price per share of the firm's stock after the debt issue?