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You own all of the equity in a debt-free app development business that generates cash flows...

You own all of the equity in a debt-free app development business that generates cash flows of $570,000 each year in perpetuity. The cost of assets, kAssets is 12 percent and the tax rate is 20 percent.

If you decide to replace $1 million of equity by borrowing $1 million at an interest rate of 5 percent.

What would the kcs and WACC for your business be before and after the proposed financial restructuring? Use M&M Proposition 2 with taxes, Equation 16.5, to determine the expected return on the equity for input to the WACC calculation. Assume that all cash flows are perpetuities and that the second and third M&M conditions hold.

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SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

jeff jeffy answered 1 year ago
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