Question

Martin Company has EBIT of $65,000 and is a zero growth company.  It has $150,000 (book value) of perpetual debt outstanding carrying a coupon rate of 7% and a current market price of 101.2. Smith's current cost of equity is 9.3%, and its tax rate is 21%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.  

What is the current total market value and weighted average cost of capital?

The Martin company is also considering moving to a capital structure that is comprised of 40% debt and 60% equity, based on market values. The new funds would be used to replace the old debt and to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on debt to rise to 8.2%, while the required rate of return on equity would rise to 9.7%. If this plan were carried out, what would be Smith's new WACC and total value?

please show excel formulas if possible. Thanks!

Answer 1

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

Cell reference -