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Ratzina corporation is operating at a 75% debt level. The company has a target capital structure...

Ratzina corporation is operating at a 75% debt level. The company has a target capital structure of 60% debt and 40%equity. The market value of the equity is $ 50 million and that of debt is $ 60 million. Currently the book and market value of the debt is equal. The cost of equity of the company is 16% and the cost of debt is 10%. Ignore taxation and assume that the company is a zero growth firm which fully pays out its earnings as dividends.

  1. What is the current level of the company’s earnings?
  1. Calculate WACC at the present level capital structure.

  1. If the company redeem a portion of its debt to meet the target capital structure, and as a consequence cost of equity goes down to 12, what would be the new value of the company?

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