Sun Solar has earnings before interest and taxes of $106 million and considering making a change to its capital structure to reduce its cost of capital and increase firm value. Right now, Sun is all equity with unlevered cost of capital of 12% based on CAPM. The risk-free rate is 6%, the market risk premium (MRP=RM - Rpp) of 5% and tax rate of 40%. 1. What would be Sun's estimated levered cost of equity and cost of capital if it were to change its capital structure to the industry average in Table 1? 2. According to Table-2? Market Cap Net Income Table 1- Solar Industry Peers P/S Interest D/E stock price 37.95 Mil 1,632 Mil 77 SolarEdge Technologies Inc 67.96 7,137 -425 First Solar Inc (USD) 2.5 SunPower Corp (USD) Jinkosolar Holding Co Ltd (USD.CNY) 8.51 24.47 1,211 804 -557 1,118 0.8 19.5 648 Sunrun Inc (USD) Hanwha Q CELLS Co Ltd (USD) 5.89 7.2 587 13.95459 7.47 22 45 0.3 2 1.2 0.8 0.3 10.3 4.1 52 2 Vivint Solar Inc (USD) JA Solar Holdings Co Ltd (USD.CNY) Renesola Ltd (USD) Greatcell Solar Ltd (USD AUD) Vivorewer International PLC (USD) Sunworks Inc (USD) 2.7 2.76 -100 -7 1 52 39 0.1 51 0.7 3.8 59.6 0.7 - - 12.1 0 -185.1 19.8 -8.1 44.6 .2 0.1 0.3 0 1.07 - T O 24 355 Bond 1 -7 0.3 -1530. 7 Before-tax 1.3 1.4 Industry Average Table 2 Percent financed with debt (W) 0.6 Percent financed with equity (W) Rating cost of debt 0.1 AAA 7.00% | 7.20% 0.9 0.8 0.7 0.6 0.5 A BBB BB Assume the company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS), 1. What would be the total market value in millions) of the firm? 8.00% 8.80% 9.60% 0.2 0.3 0.4 0.5 0.6 0.65 0.7 0.8 0.9 to 11.00% 2 12.00% 0.4 0.35 0.3 0.2 0.1 13.00% 10A 14.00% 15.00% Sun Solar has earnings before interest and taxes of $106 million and considering making a change to its capital structure to reduce its cost of capital and increase firm value. Right now, Sun is all equity with unlevered cost of capital of 12% based on CAPM. The risk-free rate is 6%, the market risk premium (MRP=RM - Rpp) of 5% and tax rate of 40%. 1. What would be Sun's estimated levered cost of equity and cost of capital if it were to change its capital structure to the industry average in Table 1? 2. According to Table-2? Market Cap Net Income Table 1- Solar Industry Peers P/S Interest D/E stock price 37.95 Mil 1,632 Mil 77 SolarEdge Technologies Inc 67.96 7,137 -425 First Solar Inc (USD) 2.5 SunPower Corp (USD) Jinkosolar Holding Co Ltd (USD.CNY) 8.51 24.47 1,211 804 -557 1,118 0.8 19.5 648 Sunrun Inc (USD) Hanwha Q CELLS Co Ltd (USD) 5.89 7.2 587 13.95459 7.47 22 45 0.3 2 1.2 0.8 0.3 10.3 4.1 52 2 Vivint Solar Inc (USD) JA Solar Holdings Co Ltd (USD.CNY) Renesola Ltd (USD) Greatcell Solar Ltd (USD AUD) Vivorewer International PLC (USD) Sunworks Inc (USD) 2.7 2.76 -100 -7 1 52 39 0.1 51 0.7 3.8 59.6 0.7 - - 12.1 0 -185.1 19.8 -8.1 44.6 .2 0.1 0.3 0 1.07 - T O 24 355 Bond 1 -7 0.3 -1530. 7 Before-tax 1.3 1.4 Industry Average Table 2 Percent financed with debt (W) 0.6 Percent financed with equity (W) Rating cost of debt 0.1 AAA 7.00% | 7.20% 0.9 0.8 0.7 0.6 0.5 A BBB BB Assume the company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends (EPS = DPS), 1. What would be the total market value in millions) of the firm? 8.00% 8.80% 9.60% 0.2 0.3 0.4 0.5 0.6 0.65 0.7 0.8 0.9 to 11.00% 2 12.00% 0.4 0.35 0.3 0.2 0.1 13.00% 10A 14.00% 15.00%
