Question
The Rivoli Company has no debt outstanding, and its financial position is given by the following data: Expected EBIT $300,000 Growth rate in EBIT, gL
The Rivoli Company has no debt outstanding, and its financial position is given by the following data:
Expected EBIT $300,000 Growth rate in EBIT, gL 0% Cost of equity, rs 8% Shares outstanding, no 100,000 Tax rate, T (federal-plus-state) 25%.
Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 40% debt based on market values, its cost of equity, rs, will increase to 11% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Based on the new capital structure,
a)what is the new weighted average cost of capital?
b)What is the levered value of the firm?
c)What is the amount of debt?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started