Question
Widget Corporation is planning to repurchase part of its stock by issuing debt. As a result, the debt-to- equity ratio will rise from 0.4-to-1, to
Widget Corporation is planning to repurchase part of its stock by issuing debt. As a result, the debt-to- equity ratio will rise from 0.4-to-1, to 0.6-to-1. The firm currently has $10 million dollars in perpetual debt outstanding. The cost of this debt is 8%. The firms perpetual EBIT is $5 million in perpetuity and faces a tax rate of 30%.
A) What is the value of the firm before the transaction?
B) How much cash flow is available to shareholders (i.e., the FCFE) before the transaction?
C) What is the cost of equity before the stock repurchase? D) What is the new cost of equity after the stock repurchase?
E) What is the value of the firm after the refinancing?
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Succeeding in Business with Microsoft Excel 2013 A Problem Solving Approach
Authors: Debra Gross, Frank Akaiwa, Karleen Nordquist
1st edition
978-1285099149, 9781285963969, 1285099141, 1285963962, 978-1285715346
