1. JTI Corp. is a successful company, and it has substantial excess cash. At this time, management wants to alter JTIs weighted- average- cost-of- capital (WACC) and its expected return on equity.

JTI decides to pay a $300 million cash dividend to shareholders. This action will increase net debt.

Using the table below, and the formulas you have seen in class,

1. What is the companys pretax WACC (i.e., unlevered return) before the dividend?
2. Using the pretax WACC from (a), provide the companys new return on equity after the $300 million dividend (use the formula we covered for return on equity, when you have the unlevered return).
3. What is the companys new WACC (after tax), when the cash dividend is paid to stockholders.?

At present, before the dividend, the expected equity return is 11% and the pretax debt cost is 5%. Income tax rate is 40%.

1. JTI Corp. is a successful company, and it has substantial excess cash. At this time, management wants to alter JTIs weighted- average- cost-of- capital (WACC) and its expected return on equity.

JTI decides to pay a $300 million cash dividend to shareholders. This action will increase net debt.

Using the table below, and the formulas you have seen in class,

1. What is the companys pretax WACC (i.e., unlevered return) before the dividend?
2. Using the pretax WACC from (a), provide the companys new return on equity after the $300 million dividend (use the formula we covered for return on equity, when you have the unlevered return).
3. What is the companys new WACC (after tax), when the cash dividend is paid to stockholders.?

At present, before the dividend, the expected equity return is 11% and the pretax debt cost is 5%. Income tax rate is 40%.

Cash: 300 million

Total Debt: 600 million

Net Debt: 300 million

Equity Market Value: 500 million