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This is the entire question provided to me. During an analysis of the capital structure of Super Consolidated Inc. it has been determined that the
This is the entire question provided to me.
During an analysis of the capital structure of Super Consolidated Inc. it has been determined that the optimal debt (debt to capital ratio or DCR) should be targeted at 50%. Given the following information answer these two fundamental questions regarding its capital structure now and after the proposed changes: The market value if its current debt is $500 million, the current share price is $10 and 100 million shares are outstanding at this time. It's marginal tax rate is 40% and the beta for the firm is 1.5. Their debt is A rated and it is determined that their bond rating will drop at the optimal DCR of 50% and an additional .250 spread will be added to the debt service at that time. It is given that the rfr is 2.5%, the mrp is 6.5%, the bond spread on A ratings is.750%. (Assume market debt rate is rfr + spreads) 1) Estimate the current cost of capital (WACC) for Super Consolidated Inc. 2) At the Optimal DCR of 50%, what is the new WACC? For 5 points of extra credit: 3) if you were given the information that Super Consolidated Inc delivered after tax cash flow of $.75/share and that they were anticipating a steady growth rate of 4% for the near future, what would you value the firm at under the optimal DCR? How does that compare with its current share price Step by Step Solution
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