AE 520 Corporate Finance Middle Exam (I1) Name: Capital Restructuring and Firm Value Cooke Co. is a prominent consumer products firm. The company currently has 60000 shares, stock price is $30 per share. The company's currently has long-term debt of $360000 (D/E ratio is 20%). Cooke's current EBIT is $240000. Bob Webb, one of the company's senior vice president, pushes hard to increase the company's leverage. He argues that the company's leverage is lower than most companies within the industry. At a recent meeting of the board of directors, he proposed to issue $1 million debt to buy back outstanding shares. Cooke's current credit rating is Al, but if the company borrows $ 1 million, it will be downgraded to BBB1. Exhibit 1 contains market information. 1. What will be the: / a) Cooke's shares outstanding /b) Cooke's stock price / c) Cooke's earing per share? before and after the company issues $1 million debt and uses that proceeds to buyback stocks? 2. What is Cooke's current cost of equity and WACC? What would be cost of equity and WACC if the company issues $1 million debt and uses the proceeds to buyback stocks? 3. Discuss about the trade off theory, what are the costs and benefits associated with debt financing? Do you agree or disagree with Bob Webb? Exhibit 1 Capital Market Conditions U.S. Treasury Obligations Yield 10 year notes 3.0% Corporate Debt Obligations (above risk free rate) Credit Spread A1 2.0% BBB 1 3.0% Other Information tax rate 40.0% beta 0.8 market risk premium 5.5%