Question: COM is considering a change in its capital structure. COM will increase its debt level to a capital structure with 60% debt and repurchase shares

COM is considering a change in its capital structure. COM will increase its debt level to a capital structure with 60% debt and repurchase shares with the extra money that it borrows. COM will retire old debt to issue new debt, and the rate on the new debt will be 10%. COM currently has $50M in debt carrying a rate of 8%, and its stock price is $40 per share with 2.5 million shares outstanding. COM is a zero-growth firm and pays all its earnings as dividends. The firms EBIT is $30 million, and its tax rate is 30%. The market return is 12% and risk-free rate is 5%. COM has a beta of 1.6.

a) What is the COMs unlevered beta? In all beta levering and un-levering steps apply Hamada Equation.

b) What are COMs new beta and cost of equity if it has 60% debt?

c) What are COMs WACC and total firm value with 60% of debt?

d) What is the premium for financial risk attached to Nevada Inc.s equity, given its leverage ratio is 60%? (In other words, how much additional premium that shareholders require to be compensated for financial risk when the firm has a capital structure with 60% debt?)

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