Answer does not match the options. Show all images Show all images Show all images done loading Estimating the Effect of a Leveraged Recapitalization Under

Answer does not match the options.

Estimating the Effect of a Leveraged Recapitalization Under the proposed leveraged recapitalization, Wrigley would borrow S3 billion and use it either to pay an equivalent dividend or to repurchase an equivalent value of shares. Chandler knew that this combination of actions could affect the firm's share value, cost of capital, debt coverage, earnings per share, and voting control. Accordingly, she sought to evaluate the effect of the recapitalization on those areas. She gathered financial data on Wrigley and its peer companies Impact on share value Chandler recalled that the effect of lererage on a firm could be modeled by using the adjusted present-value formula, which hypothesized that debt increased the value of a firm by means of shielding cash flows from taxes. Thus, the present value of debt tax shields could be added to the value of the unlevered firm to yield the value of the levered enterprise. The marginal tax rate Chandler proposed to use was 40%, reflecting the sum of federal, state, and local taxes. Impact on debt rating A key assumption in the analysis would be the debt rating for Wrigley, after assuming S3 billion in debt, and whether the firm could cover the resulting interest payments. Dobrynin had suggested that Chandler should assume Wrigley would borrow S3 billion at a rating between BB and B. Was a rating of BBB likely? In that regard, Chandler gathered information on the average financial ratios associated with different debt-rating categones Dobrynin thought that Wrigley's pretax cost of debt would be around 13%. Chandler sought to check that assumption against the capital-market information given