Qatari Trading International (QTI) is a family-owned business that has grown into an asset base of Qatar Rial (QAR) 160 million ($44m) since it was founded nearly 22 years ago. Like many small and medium size companies in the Arab world, the company Is completely financed with equity, and has 9.4 million shares outstanding. As the newly hired Director of Finance, you intend to convince the family board to change QTI's capital structure by financing the purchase of an urgently needed warehouse and storage facility, including the land, at an estimated cost of QAR 40 million ($11m) with debt. Although the company's stakeholders, mostly family members, could raise the necessary capital amongst themselves, you would like to investigate the feasibility of the debt option for two reasons: First, the company could take advantage of the artificially low interest rates that are kept In place by the Central Bank to provide economic stimulus in the wake of the global financial crtsis. Second, introducing debt to its capital structure would enable QTI to generate value by creating a tax-shelter. In preparation of your upcoming meeting, you estimate the current cost of capital to be 14.2 percent. You are aware of the 35 percent flat corporate tax rate in Qatar and the local bank guotes for a 10-year revolving credit at an effective annual rate of 7.9 percent. Your project analysis suggests an annual pre-tax profit of QAR 9.8 million in perpetuity.
- Construct a market value balance sheet for QTI without the planned project.
- Determine the project's NPV, assuming it is all equity financed.
- Construct a market value balance sheet that includes the all-equity financed project. What would be the new price of the outstanding shares How many new shares must QTI issue to finance the project
- Construct a market value balance sheet after the equity issue but before the project investment. How many shares does QTI have outstanding What is the market value per share What would the market value balance sheet look like after the project investment
- Compute the market value of QTI under the alternative debt financing option. What would the market value balance sheet look like after both the introduction of debt and the project Investment What share price would you pect at that moment
- What financing method would you generally recommend for a company that seeks to maximize its firm value Explain.