LVMH currently has a debt-to-capital ratio of 10% and an average tax rate of 34%. LVMH's...

LVMH currently has a debt-to-capital ratio of 10% and an average tax rate of 34%. LVMH's bonds have a 3% yield to maturity. Using the CAPM, the firm estimates that its cost of equity is 13%.

The firm is considering a new capital structure with a debt-to-capital ratio of 50%. An investment bank has estimated that the yield to maturity on the company's bonds would rise to 7%.

The risk-free rate is 2% and the expected equity market risk premium (MRP) is 7%.

1. What is LVMH's current WACC?

2.What is the beta of LVMH's common stock?

3.What would be the beta if the company didn't have any debt (unlevered beta)?

4. What would be the new beta if the company went ahead with the recapitalization?

5. What would be the new cost of equity and WACC after the recapitalization?

Expert Solution

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jeff jeffy answered 1 year ago

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