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NewCap Corporation, a news media company, is reexamining its policy of nancing all of its projects entirely with equity. An analysis of its cost of
NewCap Corporation, a news media company, is reexamining its policy of nancing all of its projects entirely with equity. An analysis of its cost of capital suggests that the (aftertax) cost of capital will be 1.50% lower than the current one if the rm moves to a 30% debt ratio (D/V). The current beta of the rm is 0.90, the current Treasury bond rate is 7% and the market risk premium is 5.5%. The current earnings before interest and tax is $100 million, and net capital expenditures (capex depr) and net working capital spending are zero; the cash ows are expected to grow at 5% forever. Assume that the expectation on future cash ows will not be affected by any capital structure change. Tax rate is 40%. Do not consider other factors that are not stated here. (a) Estimate the value of the rm under the current debt ratio. (b) Estimate the value of the rm under the optimal debt ratio
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