Question
A firm has an expected perpetual EBIT = $6,000. The unlevered cost of capital = 8% and there are 20,000 shares of stock outstanding. The
A firm has an expected perpetual EBIT = $6,000. The unlevered cost of capital = 8% and there are 20,000 shares of stock outstanding. The firm is considering issuing $10,000 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt = 5% and the tax rate is 34%. There are no flotation costs. a) What is the value of the firm before restructuring? b) What is hte value of the firm after restructuring? c) What is the value of the equity after the restructuring? d) What is the cost of equity after restructuring? Show procedure.
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