Question
The Altec Inc. currently has debt with market value of $1,000,000, coupon rate of 6%, and the cost of debt of 6%. Company's earnings before
The Altec Inc. currently has debt with market value of $1,000,000, coupon rate of 6%, and the cost of debt of 6%. Company's earnings before interest and taxes (EBIT) are $560,000, and it is a zero-growth company. Altec's current cost of equity is 10%, and its tax rate is 40%. The firm has 60,000 shares of common stock outstanding selling at a price of $50 per share.
a.) What is Altec's current total market value (V) and weighted average cost of capital (WACC)?
b.) Altec is considering restucturing its capital structure to 40% debt, 60% equity, based on market values. Altec is planning to use the new funds to replace the old debt and the rest to repurchase stock. It is estimated theat the increase in riskiness resulting from the leverage increase would cause the required rate of return on debt to rise to 8%, while the required rate of return on equity would rise to 12%. If this plan were carried out:
i.) What would be Altec's new WACC
ii.) What would be Altec's new total value (V)
iii.) What would be Altec's new value of debt (D) adn equity (S)
iv.) What would be Altec's new stock price per share?
v.) What would be ALtec's new number shares remaining after the repurchase?
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