Limitas Inc. is a publicly traded chemical company with 200 million shares trading at $20 a share and $ 1 billion in outstanding debt; the market interest rate on the debt is 7%. The firm has a cost of capital of 10.44% and the marginal tax rate is 40%. The firm is considering issuing new equity and retiring all of its debt. Estimate the new value for the firm if it goes through with this transaction? (The riskfree rate is 5% and the market risk premium is 4%. You can also assume no growth in perpetuity)

Answer rating: 100% (QA)

To estimate the new value of the firm we need to first calculate the current value of the firm which is equal to the market value of equity plus the market value of debt Market value of equity Number ... View the full answer