21. (8%) Aaron Corp. is all-equity financed and expects zero growth. The expected EBIT = $300,000,...

 

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21. (8%) Aaron Corp. is all-equity financed and expects zero growth. The expected EBIT = $300,000, Tax rate = 40%, 100,000 shares outstanding. If the company recapitalizes, debt would be issued to repurchase stock. Before-tax cost of debt (ra) Debt Percent (Wa) Equity Percent (We) 0.10 0.90 0.20 0.80 0.30 0.70 The company uses the CAPM to estimate its cost of common equity. The risk-free rate is 5 percent, and the market risk premium (MRP) is 7 percent. Its "unlevered beta," bu, equals 1.2. What is the company's optimal capital structure, and what is the firm's cost of capital, the stock price, and the number of shares repurchased at this optimal capital structure? 7.5% 8.0% 8.8% 21. (8%) Aaron Corp. is all-equity financed and expects zero growth. The expected EBIT = $300,000, Tax rate = 40%, 100,000 shares outstanding. If the company recapitalizes, debt would be issued to repurchase stock. Before-tax cost of debt (ra) Debt Percent (Wa) Equity Percent (We) 0.10 0.90 0.20 0.80 0.30 0.70 The company uses the CAPM to estimate its cost of common equity. The risk-free rate is 5 percent, and the market risk premium (MRP) is 7 percent. Its "unlevered beta," bu, equals 1.2. What is the company's optimal capital structure, and what is the firm's cost of capital, the stock price, and the number of shares repurchased at this optimal capital structure? 7.5% 8.0% 8.8%

Answer rating: 100% (QA)

To determine the companys optimal capital structure we need to calculate the weighted average cost o... View the full answer