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Music Incorporation is currently financed by equity only and has one million share:s priced at $10 each with an expected return of 15%. The company
Music Incorporation is currently financed by equity only and has one million share:s priced at $10 each with an expected return of 15%. The company wants to switch the capital structure to 1:4 debt to equity ratio by share purchase. The financing loan carries a 10% annual interest rate. (a) Assume a tax free market. What is the expected annual return on equity for each of the two financing options? Verify that the weighted average cost of capital w ith the proposed capital structure is unchanged. (b) Assume the corporate tax rate is 30%. What is the expected annual return on equity and the weighted average cost of capital for the proposed capital structure? How many shares is the company expected to buy and what is the expected share price if the company decides to go with the proposed capital structure
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