Question
A firm currently has equity value of $500M and debt of $200M. Its E is 1.5 and has 50 million shares outstanding. a.The firm is
A firm currently has equity value of $500M and debt of $200M. Its E is 1.5 and has 50 million shares outstanding.
a.The firm is recapitalized by issuing $75M of stock and using proceeds to pay down debt.
What is the value of the outstanding equity before and after the recapitalization?
b.What is the Weighted Average Cost of Capital for the firm after the recapitalization?
Assume the expected cost of debt is 6.50%, the risk premium on the market is 7.0%, and the risk-free rate is 3%.Assume d is 0.2 and tax rate is 25%.
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Financial management theory and practice
Authors: Eugene F. Brigham and Michael C. Ehrhardt
12th Edition
978-0030243998, 30243998, 324422695, 978-0324422696
