Question
A company is considering a change in its capital structure. The company currently has $45 million in debt carrying a rate of 7%. The companys
A company is considering a change in its capital structure. The company currently has $45 million in debt carrying a rate of 7%. The companys stock price is $50 per share with 3 million shares outstanding. The company is a zero growth firm, and pays all of its earnings as dividends. The firms EBIT is $16.0 million, and it faces a 35% federal-state tax rate. The market risk premium is 5.2%, and the risk-free rate is 4%. The company is considering increasing its debt level to a capital structure with 40% debt, based on market values, and repurchasing shares with the extra money that it borrows. The company will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 8%. The company has a levered beta of 1.5. A.) What is the companys unlevered beta? B.) If the company has 40% debt, what is the companys new levered beta and its cost of equity? C.) What is the companys WACC and the total value of the firm with 40% debt?
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