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Please help me! a A firm is considering a change in its capital structure. It currently has $40 million in debt carrying a rate of
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a A firm is considering a change in its capital structure. It currently has $40 million in debt carrying a rate of 6%, and its stock price is $30 per share with 2 million shares outstanding. It is a zero-growth firm and pays out all of its earnings as dividends. The firm's EBIT is $15.333333 million, and it faces a 40% federal-plus-state tax rate. The market risk premium is 5%, and the risk-free rate is 4%. The firm is considering increasing its debt level to a capital structure with 50% debt, based on market values, and repurchasing shares with the extra money that it borrows. It will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 8%. The firm has a beta of 1.68. a. What is the firm's unlevered beta? Use market value D/S (which is the same as wd/ws) when unlevering. (5 points) b. What are its new beta and cost of equity if it has 50% debt? (5 points) c. What is its WACC with 50% debt? (5 points) d. What is its total value with 50% debt? (5 points)Step by Step Solution
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