A firm currently has equity value of $500M and debt of $200M. Its E is 1.5 and

A firm currently has equity value of $500M and debt of $200M. Its βE is 1.5 and has 50 million shares outstanding.

a.      The firm is recapitalized by issuing $75M of stock and using proceeds to pay down debt.

What is the value of the outstanding equity before and after the recapitalization?

b.      What is the Weighted Average Cost of Capital for the firm after the recapitalization?

Assume the expected cost of debt is 6.50%, the risk premium on the market is 7.0%, and the risk-free rate is 3%. Assume βd is 0.2 and tax rate is 25%.

Answer rating: 100% (QA)

a To determine the value of the outstanding equity before and after the recapitalization we need to consider the changes in equity and debt due to the ... View the full answer