CAPITAL STRUCTURE AND VALUATION

The current market value of equity of a profitable quoted company, named ZXA Inc, is $300$

million. Its outstanding permanent debt is $$700$ million.

Due to the bad economic perspectives, the company will issue shares to reimburse the

outstanding debt.

REQUIRED

a$)$ What is the current cost of equity and the WACC?

b$)$ What would be the value of the company, once unlevered?

c$)$ Show the balance sheet of the company after the announcement but before the stock

issue and the price of the new shares issued

d$)$ Show the balance sheet of the company after the stock issue?

e$)$ What would be the new cost of equity and the new WACC?

f$)$ Project the Cash flows and analyze the feasibility of an investment project with

identical risk that the company could carry out with an additional stock issue $($see details

in the following table$),$ following the WACC approach.

g$)$ Would the results change if you follow the Flow to Equity approach? Explain your answer

in detail.

h$)$ Please, compute again the feasibility of the Project if it is partially funded with debt

amounting to $8$ with the interest rate being $7\%$ and issuing costs$/$fees amount to $2\%$ of

the amount borrowed.

New investment

$($amounts in $$ millions$)$

Investment fixed assets:

To be fully depreciated during the

Years:

Sales:

$12$ investment

Cost of Goods Sold

$3$

General and administrative costs:

Additional working capital required:

$8$ per year

$30\%$ of sales

$1$ per year

$0.$ PLEASE SOLVE THE QUEST$$ONS