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)
0.300.708.3%
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 is the company's tock price at the optimal capital structure?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Mathematics For Business
Authors: Stanley A Salzman, Charles D Miller, Gary Clendenen
8th Edition
0321357434, 9780321357434
