Question
La Vergenza is currently an all equity firm that has 2,900,000 shares of stock outstanding with a market price of $15 a share. The current
La Vergenza is currently an all equity firm that has 2,900,000 shares of stock outstanding with a market price of $15 a share. The current cost of equity is 9.5% and the tax rate is 37%. The firm is considering adding $33.4 million of debt with a coupon rate of 6.0% to its capital structure. The debt will be sold at par value. Assume that that the firm exists in a world with no costs of financial distress or other market imperfections (other than corporate taxes). What are the perpetual annual cash flows available to be paid to the ordinary shareholders in the newly levered firm? a. $2.870 million p.a. b. $4.851 million p.a. c. $4.382 million p.a. d. $4.932 million p.a. e. $3.358 million p.a.
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