Question: New co. is considering a change in its capital structure. New co. currently has $20 million in debt carrying a rate of 8%, and its

New co. is considering a change in its capital structure. New co. currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2 million shares outstanding. Assume no growth and pays all of its earnings as dividends. EBIT is $14.933 million, and tax rate is 40%. The market risk premium is 4%, and the risk free rate is 6%. New co. is considering increasing its debt level to a capital structure with 40% debt, and repurchasing shares with the extra money that it borrows. New co. will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 9 %. New co. has beta of 1.0.

1.What is New co's unlevered beta? Use market value D/S when levering.

2.What are New co's new beta and cost of equity if it has 40 percent debt?

3.What are New co's WACC and total value of the firm with 40% debt?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Problem #12 (20 points): A beam is held in equilibrium by a pin at A and a cable BDE that wraps over a frictionless pulley at D, which has a radius of 0.1 m. The beam supports a vertical force of P =...

New co. is considering a change in its capital structure. New co. currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2 million shares outstanding....

2) Thomsons Corporations is considering a change in its capital structure. THOMSONS CORPORATIONS currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2...

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2...

Canvas 105 Question 4 5 pts Yellow Hammer Construction is considering a change in its capital structure. The company has $50 million in debt carrying a rate of 7%, and its stock price is $60 per...

Structure with Hamada Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 7%, and its stock price is...

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2...

Tesla (TSLA) is considering a change in its capital structure. TSLA currently has $500 million in debt carrying a rate of 10% and its stock price is $750 per share with 2 million shares outstanding....

Yellow Hammer Construction is considering a change in its capital structure. The company has $15 million in debt carrying arate of 7% and its stock price is $60 per share with 2 million shares...

1. Cruz Corporation has $100 billion of debt outstanding. An otherwise identical firm has no debt and has a market value of $600 billion. Under the Miller model, what is Cruzs value if the...

Beckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2...

The adjusted trial balance for Callahay Company as of December 31, 2011, follows. Required 1. Use the information in the adjusted trial balance to prepare (a) The income statement for the year ended...

Right-tailed test: a. z = 2.03 b. z = 0.31 We have given the value obtained for the test statistic, z, in a one-mean z-test. We have also specified whether the test is two tailed, left tailed, or...

In completing the annual T 4 Summary, which of the following is NOT true? The total of all T 4 ' s CPP , El and tax deductions must agree with the totals on the T 4 Summary. The T 4 Summary must...

A correlation between the number of murders and the number of churches in a sample of 125 towns is calculated to be 0.65. How would you interpret this correlation? Address causation and possible...

A researcher fit the following logistic model P(Y=1) = E(Y) = exp(X)/(1 + exp(X) ) to the data (n=4): (X,Y) =(0,0), (0.1,1), (1,1), (10,1) Based on the experimental application, there are only two...

Design a boost converter to provide an output W of 18 V from a 12-V source. The load is 20 W. The output voltage ripple must be less than 0.5 percent. Specify the duty ratio, the switching frequency,...

Illustrate the following types of power converter circuits with an inductive load (i) a single-phase full-wave converter (ii) three-phase half-wave converter (iii) a transistor chopper (iv)...

Problem 2: (30 points) The parameter values and operating conditions for a buck converter are given below. It is desired to regulate the inductor current constant at 5 A. Vn: 72V: Vo nominal : 40V;...

Tori and some other childeen experimented with balls to see which ones rolled. First using a piece of cardboard to use as a ramp, they angled it on a block to the floor to test the balls. Then Tori...

What is your opinion about the decision of the company of not having a formalized HR Direction but then require HR skills to be widespread across all managerial levels? Is this something you will...

What Brunello Cucinelli could do, in addition to recognize higher salary than average market, to convince young people to accept taking up manual jobs no longer appreciated by young people?

What impact would candidate B have on the team if selected for the position? Please provide reasons.