The Chief Financial Officer (CFO) of the Q14.02T Company is interested to identify the cost of capital and value of the company. Currently, the Q14.02T is an all-equity company. Earnings before interest and taxes for the company is expected to be $84,112 forever, and the cost of capital is currently 14.02 percent. The corporate tax rate applicable to this company is 33.8 percent.

Parts required

I. Calculate the market value of Q14.02T

II. Suppose Q14.02T floats a $29,983 debt issue and uses the proceeds to reduce share capital. The interest rate is 11.24 percent. Calculate the new value of the business.

III. Calculate the new value of equity.

IV. Calculate the cost of equity of Q14.02T after the debt issue.

V. Calculate the weighted average cost of capital.

VI. What are the implications for capital structure?