Question

Analysts expect the Rumpel Felt Company to generate EBIT of $9.2 million annually in perpetuity​ (starting in one​ year). Rumpel is all equity financed and its stockholders require a return of 4.9%.The value of Rumpel is $187.76 million. If Rumpel borrows $78 million​ (interest-only in​ perpetuity) with a cost of debt of 2.4%​,then what return will the stockholders​ require?

Note​:

Assume that there are no taxes.

The required return will be ___%.

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -