Question
(CFO) of A Company is interested to identify the cost of capital and value of the company. Currently, the company A is an all-equity company.
(CFO) of A Company is interested to identify the cost of capital and value of the company. Currently, the company A is an all-equity company. Earnings before interest and taxes (EBIT) for the company is expected to be $84,893 forever, and the cost of capital is currently 15.25 percent. The corporate tax rate applicable to this company is 31.7 percent.
Requirement-A. Calculate the market value of A.
Requirement-B. Suppose A floats a $27,955 debt issue and uses the proceeds to reduce share capital. The interest rate is 11.85 percent. Calculate the new value of the business. <1
Requirement-C. Calculate the new value of equity.
Requirement-D. Calculate the cost of equity of A after the debt issue.
Requirement-E. Calculate the weighted average cost of capital.
Requirement-F. What are the implications for capital structure?
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