Question

The XYZ company currently has $200000 market value (and book value) of perpetual debt outstanding carring a coupon rate of 6%. Its EBIT are $100000, and it is zero-growth company with 100% payout ratio. XYZ's current cost of equity is 8.8%, and its tax rate is 40%. The firm has 10000 shares of common stock outsatnding selling at a price per share of $60.

a) XYZ is considering issuing $200000 of addition debt and using the proceeds to repurchase stock. it is estimated that if the leverage were increased by raising the level of debt $400000, the interest rate on the new debt would raise to 8%, and cost of equity would raise to 9.6%. The old 6% debt is senior to the new debt, and it would remain outstanding, continue to yield 6%, and have a market value of $200000. If this plan were carried out, what would be XYZ's new total value?

b) what would be XYZ's new WACC?

c) what would be XYZ's new stock price per share at debt level of $400000?

d) How many shares approximately would XYZ repurchase in the recapitization?

Answer 1