Question
Marley's is an unlevered firm with a stock price of $50. The firm projects earnings before interest and taxes of $100,000 in perpetuity. The firm
Marley's is an unlevered firm with a stock price of $50. The firm projects earnings before interest and taxes of $100,000 in perpetuity. The firm is considering THREE alternatives: (1) issuing $300,000 of bonds with an attached interest rate of 6 percent to repurchase shares. (2) issuing $550,000 of bonds with an attached interest rate of 8 percent to repurchase shares. (3) buying back $150,000 of the firms equity with cash on hand. Assume a 20 percent tax rate and 10,000 shares outstanding.
What is the WACC of Alternative (1)?
NOTE: The return on equity is not provided in the above setup, however you can calculate it.
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