Athabascan Drilling is currently unlevered and is valued at $10 million. The company is considering including debt in its capital structure and would like to know the likely impact on its value and cost of capital. The current cost of equity is 22 percent. The firm is considering offering $2 million of new debt with an interest rate of 14 percent. Athabascan Drilling will use the proceeds of the debt issue to repurchase stock. There are currently 1 million shares outstanding and the marginal tax rate is 34 percent.
a. What is the new value of Athabascan Drilling?
b. What is the new WACC for Athabascan Drilling?

  • CreatedFebruary 25, 2015
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