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Question 1 Currently, ABC Corp. has as market capitalization of $400 million and a market value of debt of $150 million. The current cost of
Question 1
Currently, ABC Corp. has as market capitalization of $400 million and a market value of debt of $150 million. The current cost of equity for ABC Corp. is 12% and its current cost of debt is 5%. Assume perfect capital markets (no taxes, no market frictions). You are trying to assess how different transaction would affect the cost of equity.
- Suppose ABC issues $150 million of new equity and buys back the debt it currently has outstanding. What is ABCs cost of equity after this transaction?
- Suppose ABC issues an additional $150 million of new debt and pays its shareholders a dividend (so total debt after this transaction is $300mn). Assuming its cost of debt remains at 5%, what is ABCs cost of equity after this transaction?
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