LEARNING GOAL: I’M WORKING ON A BUSINESS MULTI-PART QUESTION AND NEED AN EXPLANA

Learning Goal: I’m working on a business multi-part question and need an explanation and answer to help me learn.Gamestart is a videogame retailer that operates mainly in the US. The company has
issued common stock equity, partly owned by institutional investors, and bonds to
finance its operations. Those are its only sources of capital. The company’s shares
are publicly traded in the New York Stock Exchange (NYSE). Gamestart has a new
management team that is currently implementing a significant restructuring plan.
Some of the most important changes are the following: (a)
 Gamestart is selling the properties that used to house its brick and mortar
stores, as it will mostly rely on home delivery for its products in the future.
As a result, the company’s ratio of fixed to total assets will drop significantly.
 Gamestart announced a big investment plan that will allow the company to
expand its operations to the streaming services sector. The new investment
involves the launch of a new streaming platform for movies, series, and
documentaries. After the announcement, Gamestart stock price
skyrocketed, reflecting the news. As a result, the stock of Gamestart is now
trading at a much higher trailing price-to-earnings ratio compared to the
stocks of its peers, and is expected to remain so for the near future.Gamestart managed to penetrate successfully the Canadian market, and
now more than one third of its revenues comes from its operations in
Canada.
Discuss how each one of the three aforementioned changes will affect the
theoretically optimal leverage ratio of Gamestart, relating your discussion to the
trade-off theory of capital structure.(b) Gamestart announced its intention to issue new shares via a seasoned equity
offering (SEO). Upon the announcement, the market price of its stock dropped by
3%. Discuss the potential reasons for this drop in the context of the pecking order
theory of capital structure. Discuss whether the drop would have been higher or
lower if, ceteris paribus, (i) the number of financial analysts following the firm was
lower, (ii) the company’s debt was not rated, or (iii) the company had no institutional
investor ownership. (c) The US economy is experiencing high growth rates driven mainly by consumers’
pent-up demand, which was unleashed after the end of lockdowns. As a result,
several changes can occur in the US economy and financial markets. Discuss the
potential impact of each one of the following hypothetic changes on the weighted
average cost of capital (WACC) of Gamestart. When discussing the impact of each
one of these changes, assume that everything else remains constant.
i. The US Federal Reserve Bank raises the reference interest rate in order
to prevent the outbreak of inflationary pressures.
ii. The annual expected return for the S&P 500 (i.e., the benchmark index
for the US stock market) is revised upwards.
iii. The credit rating agencies upgrade the credit rating of the bonds that
have been issued by Gamestart.
iv. The US government lowers the US corporate tax rate.
Requirements: each question should be 250-400 words   |   .doc file