Question

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?

Answer #1

Currently

EBIT = $4750

Less I = 0

Less Tax @ 35% = $1662.50

PAT =$3087.50

So, value of equity= value of company = $3087.50/0.1646 =
**$18757.59**

After stock repurchase,

Value of Levered firm =Value of unlevered firm + Debt * tax rate = $18757.59 + $10410*0.35 =$22401.09

Value of Debt = $10410

Value of Equity =$22401.09-$10410= $11991.09

new Cost of levered equity = 16.46%+ (16.46%-11.52%)*10410/11991.09*(1-0.35) = 0.19248 =19.248%

So, WACC = 10410/22401.09*11.52%*(1-0.35)+ 11991.09/22401.09 * 19.248%

= 0.13783 or 13.78%

Alternatively,

Value of Levered firm =Value of unlevered firm + Debt * tax rate = $18757.59 + $10410*0.35 =$22401.09

NOPAT = EBIT*(1-tax rate) = $4750 *0.65 =$3087.50

So, WACC = NOPAT/Value of firm =3087.50/22401.09 = 0.1378 or
**13.78%**

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...

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%...

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?

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....

DDD is an unlevered firm with a cost of capital of 11.6%. The
company is considering adding debt to its capital structure to
reduce equity. Specifically, the company is evaluating the
consequences of adding $6 million in perpetual debt at a pre-tax
cost of 5.3%. The firm expects to generate EBIT of $5 million every
year into perpetuity. Assume interest expense is tax deductible.
The firm pays a tax rate of 38%. Ignore financial distress
costs.
Based on MM Prop...

The ABC firm is currently unlevered and is valued at $800,000.
Assuming the current of cost of equity is 10%. If the firm is
issuing $250,000 in new debt with an 7.6% interest rate. it would
repurchase $250,000 of stock with the proceeds of the debt issue.
There are currently 28,000 shares outstanding and its effective
marginal tax bracket is 25%. If cost of equity increases to 12.82%,
what will ABC’s new WACC be after debt issue?

CCC is an unlevered firm with a cost of capital of 13.4%. The
company is considering adding debt to its capital structure to
reduce equity. Specifically, the company is evaluating the
consequences of adding $4 million in perpetual debt at a pre-tax
cost of 6.3%. The firm expects to generate EBIT of $4 million every
year into perpetuity. Assume interest expense is tax deductible.
The firm pays a tax rate of 33%. Ignore financial distress
costs.
Based on MM Prop...

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 $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...

An unlevered company (just common stock, no preferred) with a
cost of equity of 10% generates $4 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 5% 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...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 7 minutes ago

asked 11 minutes ago

asked 16 minutes ago

asked 31 minutes ago

asked 49 minutes ago

asked 58 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago