XYZ is an all-equity funded firm with a market value amounting to $4000 million. It is planning to announce a $1000 million issue of perpetual debt, at a 6% interest rate, to buy back shares. The number of shares outstanding before this move is 40 million. After the bond issue XYZ is expected to maintain the same capital structure forever.

XYZ is expecting perpetual yearly earnings before interest and taxes amounting to $500 million.

In this market, the return on the risk-free asset is 2%, the expected return on the market portfolio is 8% and the corporate tax rate is 25%

REQUIRED

a) What is XYZ's weighted average cost of capital before the announcement of the debt issue?

b) What is the beta of the shares before the announcement of the debt issue?

c) Show XYZ's balance sheet before and after the announcement

d) Compute the numbers of shares to be bought

e) Show XYZ's balance sheet after the bond issue

f) What is the new cost of equity after the change in capital structure?

g) What is the new weighted average cost of capital?

h) What is the beta of the shares after the debt issue?

i) What is the unlevered beta for this company?

Answer rating: 100% (QA)

A Weighted average cost of capital before the announcement of the debt issue WACC EV x RE DV x RD x ... View the full answer