Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

11. (20 points) A company's debt to equity (D/E) ratio is currently o.25. It has 2 million shares outstanding. According to its most recent Income

image text in transcribed

11. (20 points) A company's debt to equity (D/E) ratio is currently o.25. It has 2 million shares outstanding. According to its most recent Income Statement, the net income is $50 million, the depreciation is $3 million, and the interest expense is $1 million. There will be no purchase or sale of fixed assets, and its working capital is expected to stay constant. Its free cash flow is expected to grow at a constant rate of 4% per year indefinitely. The corporate tax rate of this company is 35%, the cost of equity is 10%, and its cost of debt is 6%. The company plans to raise additional debt to repurchase some shares outstanding. The new target D/E ratio is o.6. Assume all MM conditions except the corporate tax are satisfied. What is the weighted average cost of capital (WACC)? What is the firm's market value before the recapitalization? What are the WACC and market value of the firm after the recapitalization

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Unlimited Business Financing

Authors: Trent Lee, Dr Chad Lee

1st Edition

1934275050, 9781934275054

More Books

Students also viewed these Finance questions

Question

Calculate the wavelength of a 0.23-kg ball traveling at 0.10m/s.

Answered: 1 week ago

Question

Understand the basic theories and concepts of OD

Answered: 1 week ago