Athabascan Drilling is currently unlevered and is valued at $10 million. The company is considering including debt

Question:

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?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...