Question
Navarro Corp. has no debt but can borrow at 5.9 percent. The firms WACC is currently 9.20 percent, and the tax rate is 21 percent.
Navarro Corp. has no debt but can borrow at 5.9 percent. The firms WACC is currently 9.20 percent, and the tax rate is 21 percent.
a. What is the companys cost of equity?
b. If the company decides to raise $10 million perpetual debt and converts to 25 percent debt (of the levered firm value), what will its cost of equity be? Is your answer consistent with Modigliani-Millers proposition? Why?
c. What are the firm values before and after the company raised the debt?
d. What is the companys WACC in part (a)? In part (b)?
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International Financial Management
Authors: Jeff Madura
3rd Edition
0314862722, 978-0314862723
