Practice problem 2:

The triple YYY corporation is an all equity firm , has an expected EBIT of $6M per year, constant & perpetual. The company's cost of equity is 15%. The firm is considering issuing $2.0M worth of debt at 10% and will be sold at par. The proceeds will be used to retire $2M of equity.

Find i) VU= ? Answer: $40M

ii) Assume you own 20% of this company, what is your ROE before and after restructuring? Answer: (15%, 15.26%)

iii) Use M & M proposition II to prove that your ROE after the restructuring is the same as in ii). Answer: 0.15 + (0.15 - 0.10) 2/38 = 15.26%

iv) WACC before restructuring? Answer: (15%)

v) WACC after restructuring Answer: (15%)

I provided the answers to the question but want a step by step on how to get to the answer