Question
XYZ, Inc. is currently capitalized with 100% equity that has a current cost of 8.00% and a beta of 1.50. They are considering issuing debt
XYZ, Inc. is currently capitalized with 100% equity that has a current cost of 8.00% and a beta of 1.50. They are considering issuing debt to recapitalize. The firm has talked with an investment bank who estimates that they will be able to issue debt according to the following cost schedule (with no more than 40% debt). XYZ has EBIT of 120 million with a corporate tax rate of 35%. The risk-free rate is 3%. What is the firm's optimal capital structure? What is the WACC at this level, and what is the new firm value? (Complete the analysis within the file and write a brief answer to the questions about the firm's capital structure in the text box) |
Cost of Debt Schedule | ||||
% Debt | Before-Tax Cost | |||
10% | 5.50% | |||
20% | 6.00% | |||
30% | 6.50% | |||
40% | 7.00% | |||
Ebit | ||||
Tax Rate | ||||
Current Beta | ||||
Cost of Equity (unlevered) | ||||
Market Risk Premium | ||||
Value of Unlevered Firm | ||||
Weight of Debt | Beta | Cost of Equity | WACC | Value of Firm |
0% | ||||
10% | ||||
20% | ||||
30% | ||||
40% |
Type your answers to the questions above in this text box. You can expand the box as needed, but you only need to include a brief, but clear, answer.
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