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Examples 1. Tool Manufacturing has an expected EBIT of $89,000 and a tax rate of 40%. The firm has $95,000 in outstanding debt at an

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Examples 1. Tool Manufacturing has an expected EBIT of $89,000 and a tax rate of 40%. The firm has $95,000 in outstanding debt at an interest rate of 8.5%, and its current debt to equity ratio is 25%. The market price of Tool's share is $2 and it has 190,000 common shares outstanding. The risk-free rate in the economy is 5% and market risk premium is estimated at 6%. Tool Manufacturing's beta at the moment is 1.2. The firm feels it can increase its share price in the market if it issues more debt of $95,000 and uses the proceeds to repurchase its common stock from the market. However, Tool's bond rating will decline as a result of higher leverage, and its interest rate on all debt will rise to 10%. Calculate (1) the current WACC of Tool, (2) the new WACC after recapitalization and (3) the market price of the common stock due to recapitalization

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