Nodebt, Inc., has zero debt (w_d = 0). It is considering restructuring to increase its percentage of debt to wd 5 40%. Its beta is 0.8, the riskfree rate is 6%, the market risk premium is 7%, and if it restructures, the required return on its debt will be 9%. Nodebt’s tax rate is 25%. 

a. Using the Hamada equation, calculate Nodebt’s required return on equity after the recapitalization. 

b. Using the MM model with corporate taxes (Equation 17-16) calculate Nodebt’s required return on equity. 

c. Using the APV model, calculate Nodebt’s required return on equity. 

d. Explain why these three answers are different.

Data from in Equation 17-16

Transcribed Image Text:

T₁ = ₁ + (rr)(1-T)(w/w) r. sl. r. sl