Question
The Chief Financial Officer (CFO) of the Q13.70T Company is interested to identify the cost of capital and value of the company. Currently, the Q13.70T
The Chief Financial Officer (CFO) of the Q13.70T Company is interested to identify the cost of capital and value of the company. Currently, the Q13.70T is an all-equity company. Earnings before interest and taxes (EBIT) for the company is expected to be $89,603 forever, and the cost of capital is currently 13.70 percent. The corporate tax rate applicable to this company is 31.2 percent.
Requirement-A. Calculate the market value of Q13.70T.
Requirement-B. Suppose Q13.70T floats a $28,864 debt issue and uses the proceeds to reduce share capital. The interest rate is 8.01 percent. Calculate the new value of the business.
Requirement-C. Calculate the new value of equity.
Requirement-D. Calculate the cost of equity of Q13.70T after the debt issue.
Requirement-E. Calculate the weighted average cost of capital.
Requirement-F. What are the implications for capital structure?
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Intermediate Financial Management
Authors: Eugene F. Brigham, Phillip R. Daves
11th edition
978-1111530266
