Question
Aaron Corp. is all-equity financed and expects zero growth. The expected EBIT = $500,000, Tax rate = 40%, 100,000 shares outstanding. If the company recapitalizes,
Aaron Corp. is all-equity financed and expects zero growth. The expected EBIT = $500,000, Tax rate = 40%, 100,000 shares outstanding. If the company recapitalizes, debt would be issued to repurchase stock.
Debt Percent (Wd) Equity Percent (We) Before-tax cost of debt (rd)
0.20 0.80 8.2%
0.30 0.70 8.3%
The company uses the CAPM to estimate its cost of common equity. The risk-free rate is 5 percent and the market risk premium is 6 percent. Its unlevered beta, bU, equals 1.6. What will be the stock price if the firm first recapitalizes to 20% debt, then does again to 30% debt?
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Dropshipping Master The Art Of Product Research And Find The Most Profitable Private Label Items Across Amazon For Amazon Fba And Amazon Fulfillment And Maximizing Your Profits On Your Shopify Store
Authors: Income Mastery
1st Edition
1699430594, 978-1699430590
