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