Question
REV Inc. is unlevered and is valued at $50,000,000. It is currently deciding whether including permanent debt in its capital structure would increase firm value.
REV Inc. is unlevered and is valued at $50,000,000. It is currently deciding whether including permanent debt in its capital structure would increase firm value. The current cost of capital (unlevered cost of equity) is 10%. Under consideration is issuing $10,000,000 in new debt at a 5% interest rate, and the proceeds of the debt issuance would be used to immediately repurchase $10,000,000 of stock. The effective marginal tax bracket is 30%. Ignore any financial distress costs for purposes of answering this question and assume that the firm has enough taxable income that the firm will always be able to use the interest tax shield in other words, the debt will be outstanding FOREVER. A. What is the value of the levered firm after the recap? (provide your answer rounded to the nearest million with two decimals e.g., $42.37 million should be entered as 42.37)
B. What is REVs cost of equity after the recap (not the WACC, but cost of equity)? (provide your answer in decimals with four places, e.g., 12.4% would be 0.1240)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started