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3) (35 points) XYZ is an all equity financed firm with a constant EBIT of $1.75 million. The company does not pay any taxes currently.
3) (35 points) XYZ is an all equity financed firm with a constant EBIT of $1.75 million. The company does not pay any taxes currently. The company has a cost of equity of 20% and 500,000 shares outstanding. a) (2 points) Determine the value of the company with its current capital structure. b) (2 points) The company is considering restructuring its capital by issuing $3,937,500 in debt and buying back some of its outstanding shares. The required rate of return on debt of the company is 8%. Determine the value of XYZ company after this capital structure change. c) (5 points) Calculate the cost of equity and the WACC for the firm after the proposed change in its capital structure. d) (4 points) Given the values of levered and unlevered firms, and the WACC of levered and unlevered firms, briefly discuss the optimal capital structure for a firm when there are no corporate taxes. e) (2 points) Determine the number of shares outstanding after this capital structure change. f) (4 points) If the company pays 8% interest on its debt, calculate the break-even EBIT for the company. Given its $1.75 million EBIT, determine the capital structure that will maximize the wealth of its shareholders. 3) (35 points) XYZ is an all equity financed firm with a constant EBIT of $1.75 million. The company does not pay any taxes currently. The company has a cost of equity of 20% and 500,000 shares outstanding. a) (2 points) Determine the value of the company with its current capital structure. b) (2 points) The company is considering restructuring its capital by issuing $3,937,500 in debt and buying back some of its outstanding shares. The required rate of return on debt of the company is 8%. Determine the value of XYZ company after this capital structure change. c) (5 points) Calculate the cost of equity and the WACC for the firm after the proposed change in its capital structure. d) (4 points) Given the values of levered and unlevered firms, and the WACC of levered and unlevered firms, briefly discuss the optimal capital structure for a firm when there are no corporate taxes. e) (2 points) Determine the number of shares outstanding after this capital structure change. f) (4 points) If the company pays 8% interest on its debt, calculate the break-even EBIT for the company. Given its $1.75 million EBIT, determine the capital structure that will maximize the wealth of its shareholders
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