Company ABC is an all-equity firm. It currently has 50,000 shares of stock outstanding, each share...

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Company ABC is an all-equity firm. It currently has 50,000 shares of stock outstanding, each share selling at $16.15. The firm also has an EBIT of 95,000 each year forever. Assume the firm's net capital spending equals to its depreciation every year and there is no change in net working capital. The corporate tax rate is 15%. (Hint: this suggests the firm's pre-tax cash flow from assets equals to EBIT.) a. What is the unlevered cost of equity of this firm? b. Now the company considers borrowing some debt at 5% interest rate. It will use the proceeds from debt issuance to repurchase stock shares. If the value of the firm increases to $815,000 after it borrows the debt and repurchases stock shares, how much does the company borrow? What is the stock price after the debt issuance and stock repurchase? How many shares does the firm repurchase? C. d. What is the cost of equity after the debt issuance and stock repurchase? What is the WACC after recapitalization? e. Company ABC is an all-equity firm. It currently has 50,000 shares of stock outstanding, each share selling at $16.15. The firm also has an EBIT of 95,000 each year forever. Assume the firm's net capital spending equals to its depreciation every year and there is no change in net working capital. The corporate tax rate is 15%. (Hint: this suggests the firm's pre-tax cash flow from assets equals to EBIT.) a. What is the unlevered cost of equity of this firm? b. Now the company considers borrowing some debt at 5% interest rate. It will use the proceeds from debt issuance to repurchase stock shares. If the value of the firm increases to $815,000 after it borrows the debt and repurchases stock shares, how much does the company borrow? What is the stock price after the debt issuance and stock repurchase? How many shares does the firm repurchase? C. d. What is the cost of equity after the debt issuance and stock repurchase? What is the WACC after recapitalization? e.

Answer rating: 100% (QA)

SOLUTION a Since the company is allequity the unlevered cost of equity is equal to the required return on the companys assets The required return on t... View the full answer