Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Can anyone give detailed explanation to this question? Thanks~ KD Industries is expected to generate free cash flow of $200 million next year. Since next
Can anyone give detailed explanation to this question? Thanks~
KD Industries is expected to generate free cash flow of $200 million next year. Since next year, the free cash flow is expected to grow at a stable rate of 6% for the first 10 years and then grow 3% forever. It has $0 million cash in the bank now. The firm currently uses 100% equity, and its cost of equity is 12%. It pays a 35% corporate tax rate. (1) What is the firm value now? (2) The firm's management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. The cost of debt will be 5%. After the recapitalization, what should be the firm value? (3) Assume that the firm's management is also considering another recapitalization plan, which is the borrow money to maintain a constant debt to equity ratio of 0.75. What is the firm after-tax WACC after the recapitalization? The cost of debt will be 5%
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