Question

In: Finance

A firm currently finances its operations with $50M of equity at a required return of 15%...

A firm currently finances its operations with $50M of equity at a required return of 15% and $50M of bonds at an annual coupon rate of 9%. The firm is considering issuing another $10M of bonds (with the same coupon rate) to retire some equity.

(A) What is the firm’s current cost of capital? What do you expect firm’s cost of capital to be after the recapitalization?

(B) What do you expect the firm’s cost of equity to be after the recapitalization?

Please show all work

Solutions

Expert Solution

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

The book value of equity for Shale Oil, Inc. is currently $23/share. Its required rate of return is 9%.
The book value of equity for Shale Oil, Inc. is currently $23/share. Its required rate of return is 9%. The company’s expected EPS one period from today is $3.74. Assuming that the company’s EPS is expected to grow at a constant rate of 4% per year in perpetuity, calculate the present value of the company’s stock.
A firm is currently 100% equity financed and the beta of its equity is 0.9.
A firm is currently 100% equity financed and the beta of its equity is 0.9. If the firm changes to 20% debt financing and the beta of debt iss 0.1.What will be the beta of its equity after the change in the capital structure?
What is the WACC for a firm using 55% equity with a required return of 35%
What is the WACC for a firm using 55% equity with a required return of 35%, 15% debt with a required return of 8%, 10% preferred stock with a required return of 10%, and a tax rate of 35%?11.07%15.72%21.03%10.72%
Edison is currently an all-equity firm with an expected return of 12%. Edison's firm value is...
Edison is currently an all-equity firm with an expected return of 12%. Edison's firm value is $500m. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume that there are no coporate taxes, no market frictions and no bankruptcy costs. Make sure to read all questions below (4 questions each worth 15 points) Q1 (15 points) Suppose Edison wants to borrow to the point that its debt-equity ratio is 0.50. What is the value...
Hardmon Enterprises is currently an​ all-equity firm with an expected return of 12 %12%. It is...
Hardmon Enterprises is currently an​ all-equity firm with an expected return of 12 %12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. a. Suppose Hardmon borrows to the point that its​ debt-equity ratio is 0.50. With this amount of​ debt, the debt cost of capital is 4 %4%. What will the expected return of equity be after this​ transaction? b. Suppose instead Hardmon borrows to the point that its​...
5. Hardmon Enterprises is currently an​ all-equity firm with an expected return of 17.2% It is...
5. Hardmon Enterprises is currently an​ all-equity firm with an expected return of 17.2% It is considering borrowing money to buy back some of its existing shares. Assume perfect capital markets. a.Suppose Hardmon borrows to the point that its​ debt-equity ratio is 0.50. With this amount of​ debt, the debt cost of capital is 6%. What will be the expected return of equity after this​ transaction? b. Suppose instead Hardmon borrows to the point that its​ debt-equity ratio is 1.50....
Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is 12%. It...
Windsor, Inc. is currently an all-equity financed firm, and its cost of equity is 12%. It has 20,000 shares outstanding that sell for $25 each. The firm contemplates a restructuring that would borrow $100,000 in perpetual debt at an interest rate of 8% which will be used to repurchase stock. Assume that the corporate tax rate is 35%. (1) Calculate the present value of the interest tax shields and the value of the firm after the proposed restructuring. (2) What...
Assume that Firm XYZ’s ROE= 15%, its beta = 2, the market return = 15%, the...
Assume that Firm XYZ’s ROE= 15%, its beta = 2, the market return = 15%, the risk-free rate = 5%. The firm’s current Dividend Payout Ratio = 60%. If the firm increases its Dividend Payout Ratio to 80%, its instinct value will a)Increase b)Decrease c)Stay the same d)Not enough information to decide e)First decrease in short-term and then increase in the long-term
Assume that Firm XYZ’s ROE= 15%, its beta = 2, the market return = 15%, the...
Assume that Firm XYZ’s ROE= 15%, its beta = 2, the market return = 15%, the risk-free rate = 5%. The firm’s current Dividend Payout Ratio = 60%. If the firm increases its Dividend Payout Ratio to 80%, its instinct value will Increase Decrease Stay the same Not enough information to decide First decrease in short-term and then increase in the long-term
GRK Co. is currently an all-equity firm with an expected return of 10%. The expected EBIT...
GRK Co. is currently an all-equity firm with an expected return of 10%. The expected EBIT is $ 50,000 forever. Assume that the firm distributes all the net income to the equity holders. The firm is considering a leveraged recapitalization in which it would borrow $ 250,000 and repurchase existing shares. The firm's tax rate is 40%. The cost of debt is 7%. 1/ Calculate the value of the firm with leverage. 2/ Calculate the expected return of equity after...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT