Question

A company has an EBIT of $4,750 in perpetuity. The un levered cost of capital is...

A company has an EBIT of $4,750 in perpetuity. The un levered cost of capital is 16.46%, and there are 27,230 common shares outstanding. The company is considering issuing $10,410 in new bonds at par to add financial leverage. The proceeds of the debt issue will be used to repurchase equity. The YTM of the new debt is 11.52% and the tax rate is 35%. What is the weighted average cost of capital after the restructuring?

a) 13.44

b) 13.78

c) 14.13

d) 14.47

e)14.82

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Answer #1
WACC after restructuring
Value of Unlevered firm =
EBIT*(1-Tax)/Re(levered)
EBIT = 4750
Tax rate = 35%
Re = 16.46%
Value of UnLevered firm = 18757.59
Value of levered firm = 22401.09
18757.59*+10410
Debt to borrow = 10410
YTM on debt = 11.52%
RE = 16.46%+(16.46%-11.52%)*(10410/(22401.39-10410)*(1-35%)
19.25%
Computation of WACC
Source Weight Cost WACC
Debt 46.47% 7.49% 3.48%
equity 53.53% 19.25% 10.30%
13.78%
answer =option b) 13.78%
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