Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Please show step-to-step calculation, thank you. DIY has EBIT of $4 million per year forever. Its cost of equity is 12% and tax rate is

Please show step-to-step calculation, thank you.

DIY has EBIT of $4 million per year forever. Its cost of equity is 12% and tax rate is 40%. There are 1.2 million shares outstanding. It also has $8 million (face value) perpetual debt which pays annual coupon of 5%, and is trading at 125% of the face value.

DIY wants to borrow new perpetual debt of $2 million at current cost of debt to buy back its common stocks. Due to this new debt, there will be present value of bankruptcy cost of $300,000.

  1. Calculate the equity value, firm value, stock price, debt equity ratio, and EPS under the current capital structure.
  2. Calculate the equity value, firm value, stock price, debt equity ratio, and EPS under the new capital structure.
  3. What is the breakeven EBIT of the two capital structures?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals of Financial Management

Authors: Eugene F. Brigham, Joel F. Houston

13th edition

978-1285027371, 128502737X, 978-1133541141

More Books

Students also viewed these Finance questions

Question

Recognize the causes and symptoms of stress.

Answered: 1 week ago

Question

Recognize the importance of reviewing your business plan.

Answered: 1 week ago