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The MD Manufacturing Company has $75m debt outstanding with pre-tax cost of 6% and its common stock has a value of $125m. The levered cost
The MD Manufacturing Company has $75m debt outstanding with pre-tax cost of 6% and its common stock has a value of $125m. The levered cost of equity is 14.34%. The corporate tax rate is 35%. Assuming an MM (1963) tax world, calculate the following for MD:
(i) the unlevered cost of equity.
(ii) the weighted average cost of capital (WACC).
(iii) the earnings before interest and tax (EBIT).
(iv) Assume MD restructures its capital by issuing $25m in debt and uses the proceeds to buy back stocks. Calculate the market value of MD after restructuring.
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