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Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company's EBIT was $ 1 2 0
Assume you have just been hired as a business manager of PizzaPalace, a regional pizza restaurant chain. The company's EBIT was $ million last year and is not expected to grow. PizzaPalace is in the stateplusfederal tax bracket, the riskfree rate is percent, and the market risk premium is percent. The firm is currently financed with all equity, and it has million shares outstanding.
When you took your corporate finance course, your instructor stated that most firms' owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. If the company were to recapitalize, then debt would be issued, and the funds received would be used to repurchase stock. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures:
tabletablePercent Financedwith Debt,
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