Firm XYZ is unlevered and has 32,000 shares outstanding. The firm currently pays no corporate income...

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Firm XYZ is unlevered and has 32,000 shares outstanding. The firm currently pays no corporate income tax. The firm is valued at $640,000. The firm has an equity beta of 0.8, the market risk premium is 10% and the risk free rate is 4%. XYZ is considering raising $300,000 in perpetual debt at 8% interest rate and using it to repurchase $300,000 worth of common shares. The change in capital structure will cost $25,000 in flotation costs (which will lower the value of the firm by $25,000). a) What is the value of the firm after the change in capital structure? b) What is the cost of equity before and after the debt issue? c) How would your answer to part a) change if the corporate tax rate was 34%? Suppose initially the firm is still worth $640,000. Assume that the flotation costs are not tax Firm XYZ is unlevered and has 32,000 shares outstanding. The firm currently pays no corporate income tax. The firm is valued at $640,000. The firm has an equity beta of 0.8, the market risk premium is 10% and the risk free rate is 4%. XYZ is considering raising $300,000 in perpetual debt at 8% interest rate and using it to repurchase $300,000 worth of common shares. The change in capital structure will cost $25,000 in flotation costs (which will lower the value of the firm by $25,000). a) What is the value of the firm after the change in capital structure? b) What is the cost of equity before and after the debt issue? c) How would your answer to part a) change if the corporate tax rate was 34%? Suppose initially the firm is still worth $640,000. Assume that the flotation costs are not tax

Answer rating: 100% (QA)

a The value of the firm after the change in capital structure can be calculated as follows Value of ... View the full answer