Question

AHP2 Inc. expects its EBIT to be $12,500 perpetually. The firm can borrow at 5% but currently has no debt, and its cost of equity is 12%. It has 10,000 shares outstanding. The tax rate is 21%. AHP2 plans to borrow $40,000 and use the proceeds to repurchase shares. The additional borrowing is not going to affect the firm’s credit rating and accordingly the expected bankruptcy costs.

AHP2 price per share will _______at the announcement of debt issuance and _________ at the time of actual recapitalization since markets incorporate new information immediately.

The cost of equity (Re) of the levered firm is _____ the cost of equity of the unlevered firm because ____.

The cost of capital (the weighted average cost of capital - WACC) of the levered firm is __________ the cost of capital (WACC) of the unlevered firm because _______.

Answer #1

AHP2 price per share will **Higher** at the
announcement of debt issuance and **Lower** at the
time of actual recapitalization since markets incorporate new
information immediately.

The cost of equity (Re) of the levered firm is
**higher** the cost of equity of the unlevered firm
**because debt increases risk to stockholders**.

The cost of capital (the weighted average cost of capital -
WACC) of the levered firm is **Lower** the cost of
capital (WACC) of the unlevered firm because **cost of debt
is lower then cost of equity.**.

Cede & Co. expects its EBIT to be $82125 every year forever.
The firm can borrow at 9%. Cede currently has no debt, and its cost
of equity is 22%. The tax rate is 35%. What is the firm’s cost of
equity capital after borrowing $45,000 and using the proceeds to
repurchase shares (i.e., after recapitalization)? (Answer in
percentage terms and round to 2 decimal places. Do not round
intermediate calculations.)

Bruce & Co. expects its EBIT to be $100,000 every year
forever. The firm can borrow at 11%. They currently have no debt, a
cost of equity of 18%, and a 20% tax rate. Bruce will borrow
$61,000 and use the proceeds to repurchase shares. What will the
WACC be after recapitalization? [Note: Round to 2 decimal
places]
Please explain each step when solving.

Meyer & Co. expects its EBIT to be $66,000 every year
forever. The firm can borrow at 4 percent. Meyer currently has no
debt, and its cost of equity is 9 percent and the tax rate is 35
percent. The company borrows $100,000 and uses the proceeds to
repurchase shares.
What is the cost of equity after recapitalization? (Do
not round intermediate calculations. Enter your answer as a percent
rounded to 2 decimal places, e.g., 32.16.)
Cost of...

Meyer & Co. expects its EBIT to be $159,000 every year
forever. The firm can borrow at 8 percent. The company currently
has no debt, and its cost of equity is 15 percent and the tax rate
is 24 percent. The company borrows $201,000 and uses the proceeds
to repurchase shares.
a.
What is the cost of equity after recapitalization? (Do
not round intermediate calculations and enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)...

Meyer & Co. expects its EBIT to be $139,000 every year
forever. The firm can borrow at 7 percent. The company currently
has no debt, and its cost of equity is 10 percent and the tax rate
is 24 percent. The company borrows $186,000 and uses the proceeds
to repurchase shares. a. What is the cost of equity after
recapitalization? (Do not round intermediate calculations and enter
your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b....

Cede & Co. expects its EBIT to be $163,000 every year
forever. The company can borrow at 8 percent. The company currently
has no debt and its cost of equity is 15 percent and the tax rate
is 23 percent. The company borrows $185,000 and uses the proceeds
to repurchase shares.
a.
What is the cost of equity after recapitalization?
b.
What is the WACC?
(For all requirements, do not round intermediate
calculations and enter your answers as a...

CB expects its EBIT to be $55,000 every year forever. The firm
can borrow at 6 percent. The company currently has no debt, and its
cost of equity is 11 percent. If the tax rate is 35 percent, what
is the value of the firm? What will the value be if the company
borrows $125,000 and uses the proceeds to repurchase shares?

Meyer & Co. expects its EBIT to be $66,000 every year
forever. The firm can borrow at 8 percent. Meyer currently has no
debt, and its cost of equity is 14 percent.
If the tax rate is 35 percent, what is the value of the firm?
(Do not round intermediate calculations. Round your answer
to 2 decimal places, e.g., 32.16.)
Value of the firm
$
What will the value be if the company borrows $140,000 and uses...

Meyer & Co. expects its EBIT to be $97,000 every year
forever. The firm can borrow at 8 percent. The company currently
has no debt, and its cost of equity is 13 percent.
a.
If the tax rate is 24 percent, what is the value of the firm?
(Do not round intermediate calculations and round your
answer to the nearest whole number, e.g., 32.)
b.
What
will the value be if the company borrows $195,000 and uses the
proceeds...

An all-equity firm has a cost of equity of 11% and expects its
EBIT will be $2,200,000 every year forever. The firm is considering
borrowing $4,000,000 and using the proceeds to repurchase shares.
Assume all the Modigliani and Miller (M&M) assumptions are
satisfied and all available earnings are immediately distributed to
common shareholders. According to M&M Proposition I without
taxes, what would the value of the firm be after the capital
restructuring?

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