Kimberly Inc. is a listed firm located in a mature country, operating in two businesses: the media business, having a market value of assets of $ 700 million, and the web hosting business, having a market value of $300 million. There are 100 million shares outstanding trading at $ 6 per share and $ 400 million in debt outstanding. The company has no cash balance. The marginal tax rate is 40%. The firm's current bond rating is C and the default spread for C rated bonds is 3%, the US T.Bond rate is 2% and the equity risk premium is 5%. The current levered beta for the firm is 1.15.

a. Estimate the cost of capital (WACC) for the company

b. The firm plans to sell 33% of the web hosting business ($100ml) and use 50% of the proceeds from the sale to pay down debt, and the 50% of the proceeds to pay a special dividend. The unlevered betas, estimated from comparable companies, are 0.90 for media business and 0.5 for web hosting business. Estimate the new levered beta after this transaction.

C. Now assume that the company decides to increase the financial leverage and the new debt to capital ratio is 80%. Due to the increase in financial leverage the pre-tax cost of debt will rise of 400 basis points. Estimate the new cost of capital (considering Unlevered Beta estimated in point b)

d. Starting from information provided in point a., assume that the company plans to borrow $300 million at a pre-tax cost of debt of 5% to buy back shares. The new cost of capital, generated by the capital structure optimization, is 5.65%. Estimate the increase in firm value assuming no growth in perpetual savings. What would the buyback price have to be for the remaining shares to see trade at $6.4/share after the buyback?