Question
Augur Inc is an all-equity firm with a market capitalization of $500 million. Its equity cost of capital is 18%. The company decides to issue
Augur Inc is an all-equity firm with a market capitalization of $500 million. Its equity cost of capital is 18%. The company decides to issue $150 million in debt and use the proceeds to pay a special dividend to its shareholders. The cost of debt at the new capital structure will be 8%. Assume that there are no taxes or costs of financial distress.
a. What is the value of the firm after the change in capital structure?
a. How does the change in capital structure affect the wealth of the shareholders? Consider collectively the shareholders who owned 100% of the equity of the unlevered firm. (4 sentences at most.)
a. What is the equity cost of capital after the change in capital structure?
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