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Fat Harry's Bar, Inc. (FH) is unlevered and currently valued at $640,000. The firm is currently deciding whether including debt in its capital structure would
Fat Harry's Bar, Inc. (FH) is unlevered and currently valued at $640,000. The firm is currently deciding whether including debt in its capital structure would increase its value. The unlevered cost of equity for FH is 12%. Under consideration is issuing $300,000 in new debt with an 8% interest rate. FH would repurchase $300,000 worth of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding and the firm's effective marginal tax rate is 34%.
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