China's Manufacturing, a large leisure-time company, that owns three casinos in Atlantic city and over 300 fitness
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Question:
China's is planning to pay down debt and reduce its debt ratio (D/(D+E)) to 50%, which should raise its debt rating to A (and lower the pre-tax rate to 7.51%). The tax rate for the firm is 40%. The treasury bond rate is 7%.
b. What will the effect of the debt reduction be on the cost of capital?
c. The firm value is expected to increase by $100 million as a consequence of the debt reduction. Assuming that the firm is in steady state, what is the expected growth rate in cash flows to the firm that will yield this value increase?
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