Question
10. AC/DC Electric Co. Inc. expects perpetual EBITDA of $85,000 per year. It can borrow at 9% but currently has no debt. AC/DC's unlevered cost
10. AC/DC Electric Co. Inc. expects perpetual EBITDA of $85,000 per year. It can borrow at 9% but currently has no debt. AC/DC's unlevered cost of equity (rU) is 15% and its tax rate = 40%. Assume interest expenseistax deductible.(25 pts)
A.What is the value of AC/DC Electric as an all-equity firm? (5 pts)
B.AC/DC Electric Co. wants to recapitalize the firm by issuing $250,000 in debt to buy back an equivalent amount of stock. What is the total value of the firm after the recapitalization?(5 pts)
C.Using the value of the levered firm from part (B) above, what is value of the Equity and the value of the Debt? (5 pts)
D.What is the cost of equity for the levered firm? (5 pts)
E.What is AC/DC Electric Co.'s required return on assets (rA) or WACC after the recapitalization? (5 pts)
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