Question
Lokka Inc is currently an all-equity firm with 10 million shares outstanding, with a share price of $28. It has an EBIT of $2 million.
Lokka Inc is currently an all-equity firm with 10 million shares outstanding, with a share price of $28. It has an EBIT of $2 million. It has a beta of 0.8 with a tax rate of 20 percent. The market return is 14 percent while the risk-free rate is 3.50%. It is looking to change its capital structure by issuing 15,000 bonds at 91 percent of the par value of $1,000. The semi-annual bonds will mature in 20 years and pays a coupon rate of 8% per annum. The net proceeds will be used to repurchase shares from the market. (Note: Answer to two decimal places)
(a) What is the current cost of capital of the firm? (2 marks)
(b) What is the unlevered value of the firm? (2 marks)
(c) How many shares will Lokka repurchase with the net proceeds of the debt issuance? (Assume share price is the same) (3 marks)
(d) What is the new cost of capital? (assume cost of equity does not change) (6 marks)
(e) What is the levered value of the firm? (3 marks)
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