You are proposing that Burger King does a levered recapitalization.

Currently, Burger King is financed entirely with equity and has a market capitalization of $1,000,000. Burger King has an inventory turnover of 6.7 and a beta of 0.80. If you do the levered recap, you expect that your cost of debt will be 4%, your marginal tax rate will be 30%, and your net profit margin will be 15%. The 30-year Treasury rate is 3% and the expected return of the S&P 500 is 12%. The levered recap transaction (i.e., issue debt, buyback stock) would involve issuing debt of $200,000. You expect that the credit rating for this debt would be AA.

a. Estimate the value of the interest tax shield provided by the change in Burger King's capital structure.

b. Estimate how the levered recapitalization would affect Burger King's cost of equity.

Answer rating: 100% (QA)

a To estimate the value of the interest tax shield provided by the change in Burger Kings capital s... View the full answer