Question
ABC Company is currently 100% equity and zero growth. The firm has an annual EBIT of $1,700,000, its current cost of equity is 10%, and
ABC Company is currently 100% equity and zero growth. The firm has an annual EBIT of $1,700,000, its current cost of equity is 10%, and the corporate tax rate is 25% (assume personal taxes are zero).
The firm's CFO has decided to recapitalize by issuing $4,000,000 in debt that carries an interest rate of 6% and repurchasing shares. Assuming that the assumptions of the Modigliani and Miller models hold, what is the expected WACC after the recapitalization?
Group of answer choices
9.27%
9.00%
8.71%
8.57%
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Financial Accounting Tools for Business Decision Making
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine
5th Canadian edition
978-1118024492
