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You have been asked to analyze the capital structure of CQ Inc, and make recommendations on a future course of action. CQ Inc. has 40

You have been asked to analyze the capital structure of CQ Inc, and make recommendations on a future course of action. CQ Inc. has 40 million shares outstanding, selling at $20 per share and a debt-equity ratio (in market value terms) of 0.25. The beta of the stock is 1.15, and the firm currently has a AA rating, with a corresponding market interest rate of 10%. The current risk-free rate is 8% and the market risk premium is 5.5%.The firm's income statement is as follows:

EBIT

$150 million

Interest Expense

$20 million

Taxable Income

$130 million

Taxes

$52 million

Net Income

$78 million

A) What is the firm's current weighted average cost of capital? Show calculations.

B) What will the new stock price be if they borrow $200 million and repurchase stock? Assume a beta of 1.40. Show calculations.

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