GenCorp an automotive parts manufacturer currently has 25 million in
GenCorp, an automotive parts manufacturer, currently has $25 million in outstanding debt and has 10 million shares outstanding. The book value per share is $10, and the market price per share is $25. The company is currently rated A, its bonds have a yield to maturity of 10%, and the current beta of the stock is 1.06. The risk-free rate is 8% now, and the company’s tax is 40%.
a. What is the company’s current weighted average cost of capital?
b. The company is considering a repurchase of 4 million shares at $25 per share with new debt. It is estimated that this will push the company’s rating down to a B (with a yield to maturity of 13%). What will the company’s WACC be after the stock repurchase?
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