ABC is an all equity financed firm. It is considering altering its capital structure to satisfy stockholders unhappy with the performance of the stock. The firm currently earns (EBIT) 100,000 and pays taxes at a rate of 30%.

 

1. What is the firm's assets worth if stockholders desire a 20% return on their investment?

2. What will be the value of the assets if the firm borrows $200,000 at an interest rate of 10% to repurchase some of the stock.

3. How much is the equity worth after the borrowing ?

4. What return do the stockholders expect after the capital structure is altered?

5. What is the firm's average cost of capital?

Answer rating: 100% (QA)

Note To answer the questions we need to make a few assumptions a The firm has a perpetual cash flow meaning the earnings before interest and taxes EBI... View the full answer