The companys tax rate is 40 percent. The company uses the CAPM model to estimate its cost of equity. The risk-free rate is estimated to be 5 percent and the equity market risk premium is 6 percent. Companys estimate of its asset beta is 1.05

Companys operating profit (EBIT) is expected to be $2,000,000 in the foreseeable future. Assume no net investment in fixed assets (only depreciated assets are replenished) and working capital. ABC currently has 1,000,000 outstanding shares.

2) Assume that company is planning to recapitalize to reach an optimal capital structure. Assuming that company will use the new debt to repurchase its shares, for each D/V level determine

a) Market Value of Firm

b) Cost of equity

c) Share Price after the recapitalization announcement

d) Number of shares outstanding following the stock repurchase

e) Market Value of Equity

f) WACC and Optimal Capital Structure

g) At what level of debt, companys WACC is minimized? Explain.

DIV 0.1 0.2 0.3 0.4 0.5 Cost of Rating Debt 7.00% AA 7.2 A BB 8.8 9.6