Arm and Hammer Construction (AHC) is considering a change in its capital structure. The company has...

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Arm and Hammer Construction (AHC) is considering a change in its capital structure. The company has $40 million in debt carrying a rate of 6%, and its stock price is $80 per share with 2 million shares outstanding. AHC is a zero- growth firm and pays out all of its earnings as dividends. The firm's EBIT is $32 million, and it faces a 25% federal-plus-state tax rate. The market risk premium is 6%, the risk-free rate is 4%, and the company has a beta of 1.45. AHC is considering increasing its debt level to a capital structure with 35% debt, based on market values, and repurchasing shares with the extra money that it borrows. The company will retire old debt in order to issue new debt, and the rate on the new debt will be 8%. What is the value of the firm with 35% debt? Arm and Hammer Construction (AHC) is considering a change in its capital structure. The company has $40 million in debt carrying a rate of 6%, and its stock price is $80 per share with 2 million shares outstanding. AHC is a zero- growth firm and pays out all of its earnings as dividends. The firm's EBIT is $32 million, and it faces a 25% federal-plus-state tax rate. The market risk premium is 6%, the risk-free rate is 4%, and the company has a beta of 1.45. AHC is considering increasing its debt level to a capital structure with 35% debt, based on market values, and repurchasing shares with the extra money that it borrows. The company will retire old debt in order to issue new debt, and the rate on the new debt will be 8%. What is the value of the firm with 35% debt?

Answer rating: 100% (QA)

To find the value of the firm with 35 debt we need to calculate the weighted average cost of capital ... View the full answer