Question
A firm has expected operating income (EBIT) of $6 million per year. Currently, the firm has no debt and a required return on equity of
A firm has expected operating income (EBIT) of $6 million per year. Currently, the firm has no debt and a required return on equity of 12%. The firms managers are considering switching to a levered capital structure by issuing $7 million in debt, which would have an interest rate of 6%, and using the proceeds to repurchase equity. The corporate tax rate is 40 percent and interest is tax deductible. Except for taxes, assume that markets are perfect (no bankruptcy, etc.)
What would the firm's debt-to-equity ratio (B/S) be after this restructuring?
Enter your answer in decimal form (e.g., .35, and NOT 35%) and round your final answer to two decimal places.
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