Question
Duncan plc is financed by 5 million shares of equity with a market capitalization of 90 million, and debt with a face value and market
Duncan plc is financed by 5 million shares of equity with a market capitalization of 90 million, and debt with a face value and market value of 48 million. The interest rate on the debt is 7% and debt interest is tax deductible. The firm's most recent earnings before interest and tax is 25 million. The corporate tax rate is 20%.
a) What are Duncan's current earnings per share, share price, and cost of equity (return on equity)?
Suppose the firm decides to change its capital structure by holding an equity issue to raise enough cash to reduce the debt to 24 million. The new shares to be issued are 1.7 mn
b) What is Duncan's share price following the issuance?
c) What is Duncan's cost of equity following the equity issuance? Has it changed? Why/why not?
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