Question
2. An unlevered firm has perpetual cash flows, equity beta of 1.5, 1 million shares (P=$20). Rf = 9%, Tax rate=40%, MRP=5.5%. It is considering
2. An unlevered firm has perpetual cash flows, equity beta of 1.5, 1 million shares (P=$20). Rf = 9%, Tax rate=40%, MRP=5.5%. It is considering issuing debt and using the proceeds to repurchase equity.
D/(D+E)0%10%20%30%40%50%60%70%80%90%
Rd10.5%11%12%13%14%16%18%20%25%
a)What is the optimal capital structure?
b)Can you assess the change in firm value as a result of this decision?
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Fundamentals of Corporate Finance
Authors: Stephen M. Ross, Randolph W Westerfield, Robert R. Dockson, Bradford D Jordan
12th edition
007353062X, 73530628, 1260153592, 1260153590, 978-1260153590
