Question
Biancas Barbershops Limited (BBL) is an all-equity firm with an EBIT of $950,000. EBIT is expected to remain at this level forever. The firm pays
Biancas Barbershops Limited (BBL) is an all-equity firm with an EBIT of $950,000. EBIT is expected to remain at this level forever. The firm pays all its earnings as dividends to shareholders (ie., no growth), has a corporate tax rate of 40%, an un-levered beta of 1.24, and 845,000 common shares issued and outstanding. In the market, you observe that Government of Canada T-bills are being sold to yield 1% and the S&P/TSX Composite Index is expected to yield 9.5%. Assuming a world of taxes and a cost for the risk of default, d) What is the value of the firm if the firm issues $1,000,000 of bonds at a coupon rate of 4.5%? The beta for the equity of the leveraged firm is 1.32. e) What is the WACC for the firm with its new capital structure?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started