Only accept hand$-$written assignment. Use pen and paper, ipad or tablet, save as pdf file and upload.

After uploading your assignment, download and open it to make sure that the file is not corrupted.

Please keep at least $2$ decimal points for dollar amounts and at least $4$ significant digits for rates.

Question $3$

King Inc. is an all$-$equity firm with $5,000$ outstanding shares. Its firm value is $$250,000$ and

EBIT is $$36,000$ per year forever. The tax rate is $40\%.$ King is considering two recapitalization

plans.

Plan A: borrow $$125,000$ perpetual debt at $5\%$ interest to repurchase stocks and the present value

of bankruptcy costs is estimated to be $$0.$

Plan B: borrow $$160,000$ perpetual debt at $8\%$ interest to repurchase stocks and the present value

of bankruptcy costs is estimated to be $$7,500.$

$($a$)$ Calculate the equity value, cost of equity, weight average cost of capital, stock price after

recapitalization plan A$.$

$($b$)$ Calculate the equity value, cost of equity, weight average cost of capital, stock price after

recapitalization plan B$.$

$($c$)$ Calculate the breakeven EBIT of the two recapitalization plans.