Question
UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital= 15% and there are 20,000 shares of stock outstanding. The firm is
UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital= 15% and there are 20,000 shares of stock outstanding. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt = 10% and the tax rate= 34%. There are no flotation costs.
Assume a stockholder owns 1,000 shares of UNLEV before the restructuring. The stockholder prefers a debt/equity ratio= 1.0. How could the stockholder use homemade leverage to achieve the restructuring without the help of UNLEV? Assume there are no taxes.
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