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The Gulf Power Company currently is an all-equity firm. The value of Gulf Power's equity is...

  1. The Gulf Power Company currently is an all-equity firm. The value of Gulf Power's equity is $12,000,000 and there are 600,000 shares outstanding. The expected annual EBIT of Gulf Power is $2,400,000. Those earnings are also expected to remain constant into the foreseeable future. Gulf Power is in the 40-percent tax bracket. The Gulf Power Company plans to announce that it will issue $3,000,000 of perpetual bonds and uses the proceeds to repurchase common stock. The bonds will have a 5-percent coupon rate. After the sale of the bonds, Gulf Power will maintain the new capital structure indefinitely. The MM theory applies.   What is the firm's cost of capital before the capital restructuring?

    8%

    13%

    12%

    20%

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jeff jeffy answered 2 months ago
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