Question
A company is financed entirely by equity and has a beta of 1.0. Its cost of equity is 14%. The company decides to repurchase (buy
A company is financed entirely by equity and has a beta of 1.0. Its cost of equity is 14%. The company decides to repurchase (buy back) half of its shares and raise an equal value of debt. The company plans to maintain this capital structure thereafter. The debt is risk-free and carries an interest rate of 7%. The company is subject to an income tax rate of 25%. i. Calculate the weighted average cost of capital before the refinancing.
ii. Calculate the cost of equity after the refinancing. iii. Calculate the weighted average cost of capital after the refinancing. iv. Calculate the stock's beta after the refinancing.
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