Question
Bavarian Brewhouse is an unlevered firm with a current cost of equity of 10% and 250,000 shares of outstanding equity. The stock price is currently
Bavarian Brewhouse is an unlevered firm with a current cost of equity of 10% and 250,000 shares of outstanding equity. The stock price is currently $39 per share. The company is considering a proposal that involves issuing $1 million in debt and using all the proceeds to repurchase outstanding stock. The debt would have an interest rate of 6%. The firms corporate tax rate is 35%. What will the total value of the firm after taking on the proposed level of leverage? Except for taxes, assume that markets are perfect (no bankruptcy, etc.). Please show your work.
A. $975,000
B. $10,000,000
C. $10,100,000
D. $15,000,000
E. $15,350,000
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