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Consider Company A that has $ 1 5 0 billion dollars in total shareholder equity and $ 7 0 billion dollars in total long term
Consider Company A that has $ billion dollars in total shareholder equity and $ billion dollars
in total long term debt. Further suppose, that the cost of equity is per year and the cost of debt
is per year. Assume the firm pays no taxes.
a Calculate the WACC for Company A
b Suppose the company has decided to issue corporate bonds, which has increased its debt from
billion to $ billion dollars. Calculate the return on equity for the additional debt, then
calculate the WACC.
c Compare part a and b what do you notice about the WACC in either case and why?
d Consider the free cash flows for Company A below:
Calculate the Enterprise Value assuming the growth rate in cash flows is What is the
share price of the firm if it has billion shares outstanding. Assume is the first year, where
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