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15.XYZ currently has $10 million in debt carrying a rate of 8%, and its stock price is $45 per share with 2 million shares outstanding.
15.XYZ currently has $10 million in debt carrying a rate of 8%, and its stock price is $45 per share with 2 million shares outstanding. XYZ is a zero-growth firm and pays out all of its earnings as dividends. The firm's EBIT is $18 million, and it faces a 25% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 6%. XYZ is considering increasing its debt level to a capital structure with 30% debt, based on market values, and repurchasing shares with the extra money that it borrows. XYZ will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 10%. XYZ has a beta of 1.0. a. (15 points) What is XYZ's unlevered beta? Use market value D/S (which is the same as wa/ws) when unlevering b. (15 points) What are XYZ's new beta and cost of equity if it has 30% debt? c. (15 points) What are XYZ's WACC and total value of the firm with 30% debt
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