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The proposed acquisition of land by HRI does not seem to fit the original business pattern of HRI as it was set at inception of the company. As the case states the founder of the company engaged HRI in the purchase of underdeveloped acreage, which was then developed, for industrial use. In addition it is stated that the company’s plan from inception had been to deal in only the most potentially profitable land acquisitions. The acquisition of new property seems to in line with the company’s business plan, but since the case explicitly states that it likes to buy undeveloped property, this new proposed purchase might be out of line with the original intentions of the company’s founder. If however the new property is fairly priced as the case states that it then the company may make a wise business decision to buy even though the property is already developed and is currently occupied by a well-built office building. The forecasted increase in EBIT looks attractive at 20%, which might also make the decision a bit easier to make. 2. If HRI uses debt to finance the new acquisition of property then the company may increase the current debt ratio. This increase in the debt ratio could hurt HRI’s triple A rating with bond rating companies, which could in turn drive up the required coupon rate that investors will want in order to supply the capital that HRI needs. The new bond issue will affect the company’s income statement as shown below modified from the example in the case. The case states that their will be an increase in EBIT of 20%. EBIT $5,292,840 Less: Interest (2,795,000) Taxable income $2,497,840 Less: Taxes (30%) (749,352) Profit after-tax $1,748,488 The second option given to the company is a stock offering of 200,000 shares of common stock, which the company will net $30 per share. Issuing common stock has its advantages. No interest payments to make and possibly no downgrade in the company’s rating. In issuing common stock the company will have a new set of challenges to face. First the company must decide what the investors required return will be and then HRI must ensure that it earns an adequate return on it’s assets in order to compensate the investors. HRI must make decisions regarding dividend policy, and must ensure that an adequate amount of growth takes place in order to keep shareholders happy. The third option that the company has is to offer preferred stock at a net to the company of $93.50.
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