An unlevered $($all$-$equity$)$ firm has $500,000$ common shares trading at $$40$ per share. With its investment plan fixed, it is expected to generate a perpetual EBIT stream of $$3$ million per year. The corporate tax rate is $40\%.$ The firm is contemplating taking on debt by issuing a $$10$ million face value perpetual bond at par, carrying a $5\%$ coupon rate per year, and using the proceeds to retire some of its stock outstanding.

What rate of return do shareholders require before the firm changes its capital structure?

 

 

  

 

What will be the firm value after the firm changes its capital structure?

  

  

  

What will be firm's cost of equity after the firm changes its capital structure?

 

What will be the share price after the firm changes its capital structure?

 

 

Suppose you are holding $100$ shares bought at $$40$ per share just before the firm changes its capital structure. What will be your capital gain tax by selling your $100$ shares just after the firm changes its capital structure? Assume that the capital gain will be taxed at $20\%.$

 

  

What will be the firm's WACC after the firm changes its capital structure?

 

 

Will WACC equal ROEU with no corporate taxes?

  

Answer rating: 100% (QA)

Capital Structure Change Analysis for Unlevered Firm This scenario involves an unlevered firm considering a capital structure change by issuing debt and using the proceeds to repurchase shares Lets an... View the full answer