MINI-CASE-K15.78N10.24 The K15.78N

Company uses only equity in its capital structure. The Financial Manager of the company has estimated that the cost of capital of this currently all-equity company is 15.78 percent. The earnings before interest and taxes (EBIT) for the company are expected to be $74,991 that will continue forever. The corporate tax rate applicable to this company is 32.6 percent. Considering the cheaper cost of financing, the Financial Manager is planning to use debt in the capital structure and the manager wants to see the impact of such financing on the cost of capital and the value of the company.

Requirement-A. Calculate the current market value of K15.78N. <1 mark>

Requirement-B. In an attempt to get the benefits of being a leveraged company, K15.78N raises new debt capital of $27,636 and uses the proceeds to reduce its share capital. The interest rate is 10.24 percent. Calculate the new value of the business. <1 mark>

Requirement-C. Calculate the new value of equity of K15.78N just after being a leveraged company as per Req. (B). <1 mark>

Requirement-D. Calculate the cost of equity of K15.78N after the debt issue. <1 mark> Requirement-E. Calculate the weighted average cost of capital for the company. <1 mark>

Requirement-F. What are the cost and value implications for changing capital structure?<1 mark>