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

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

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%
0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
21，A company has an EBIT of $4,750 in perpetuity. The unlevered cost of capital is 16.46%,...
21，A company has an EBIT of $4,750 in perpetuity. The unlevered 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?
6，A company has an EBIT of $4,865 in perpetuity. The unlevered cost of capital is 16.70%,...
6，A company has an EBIT of $4,865 in perpetuity. The unlevered cost of capital is 16.70%, and there are 27,970 common shares outstanding. The company is considering issuing $10,660 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 11.75% and the tax rate is 36%. What is the cost of the levered equity after the restructuring?
A company has an EBIT of $3,715 in perpetuity. The unlevered cost of capital is 14.30%,...
A company has an EBIT of $3,715 in perpetuity. The unlevered cost of capital is 14.30%, and there are 20,570 common shares outstanding. The company is considering issuing $8,160 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 9.45% and the tax rate is 26%. What is the weighted average cost of capital after the restructuring? Question 12 options: 12.56% 12.88%...
Lone Star Industries expects to generate $75,000 of earnings before interest and taxes (EBIT) in perpetuity....
Lone Star Industries expects to generate $75,000 of earnings before interest and taxes (EBIT) in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm’s unlevered cost of capital is 18%, and the corporate tax rate is 40%. a. What is the value of the company as an unlevered firm? b. Suppose Lone Star just issued $160,000 of perpetual debt with an interest rate of 10% and used the proceeds to repurchase stock....
Company U has no debt outstanding currently and the cost of equity is 12%. Its EBIT...
Company U has no debt outstanding currently and the cost of equity is 12%. Its EBIT is expected to be $ 201896 every year forever. The tax rate is 35%. Calculate the value of the firm. Company U has no debt outstanding currently and the cost of equity is 12%. Its EBIT is expected to be $ 201896 every year forever. The tax rate is 35%.Calculate the value of the firm if it borrows $ 453493 and uses the proceeds...
AHP2 Inc. expects its EBIT to be $12,500 perpetually. The firm can borrow at 5% but...
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 _________...
Problem 1 (30 marks) Gamma Medical Company is currently an un-levered firm with a beta of...
Problem 1 Gamma Medical Company is currently an un-levered firm with a beta of 1.3925. Government of Canada T-bills are yielding 3% and the market risk premium is 8%. You expect the company will be able to earn the required rate of return forever on an expected before tax earnings of $800,000 per year. 1.      Assume that the tax rate is 40% and there is no cost for the risk of default. a)        Calculate the required rate of return for...
An unlevered company with a cost of equity of 11% generates $5 million in earnings before...
An unlevered company with a cost of equity of 11% generates $5 million in earnings before interest and taxes (EBIT) each year. The decides to alter its capital structure to include debt by adding $5 million in debt with a pre-tax cost of 6% to its capital structure and using the proceeds to reduce equity by a like amount as to keep total invested capital unchanged. The firm pays a tax rate of 28%. Assuming that the company's EBIT stream...
An unlevered company (just common stock, no preferred) with a cost of equity of 12% generates...
An unlevered company (just common stock, no preferred) with a cost of equity of 12% generates $5 million in earnings before interest and taxes (EBIT) each year. The decides to alter its capital structure to include debt by adding $6 million in debt with a pre-tax cost of 6% to its capital structure and using the proceeds to reduce equity by a like amount as to keep total invested capital unchanged. The firm pays a tax rate of 29%. Assuming...
An unlevered company (just common stock, no preferred) with a cost of equity of 12% generates...
An unlevered company (just common stock, no preferred) with a cost of equity of 12% generates $1 million in earnings before interest and taxes (EBIT) each year. The decides to alter its capital structure to include debt by adding $2 million in debt with a pre-tax cost of 6% to its capital structure and using the proceeds to reduce equity by a like amount as to keep total invested capital unchanged. The firm pays a tax rate of 33%. Assuming...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT