Paradise Co. currently has 100% equity. The value of the unlevered firm (Vu) is $1,000 with...
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Paradise Co. currently has 100% equity. The value of the unlevered firm (Vu) is $1,000 with a WACC of 20% (Ru). The company plans to change its capital structure by issuing debt of $400 at RD- 8% and uses the money to buy back shares. The corporate tax rate is 30%. After the capital restructuring of the company, the levered firm value (VL) is $1,120, and thus the firm's equity value becomes $720 (E =VL-D). What is the cost of equity of the levered firm (RE) after changing its capital structure? What is the WACC of the levered company? Is it the same as the WACC before restructuring (Ru)? Paradise Co. currently has 100% equity. The value of the unlevered firm (Vu) is $1,000 with a WACC of 20% (Ru). The company plans to change its capital structure by issuing debt of $400 at RD- 8% and uses the money to buy back shares. The corporate tax rate is 30%. After the capital restructuring of the company, the levered firm value (VL) is $1,120, and thus the firm's equity value becomes $720 (E =VL-D). What is the cost of equity of the levered firm (RE) after changing its capital structure? What is the WACC of the levered company? Is it the same as the WACC before restructuring (Ru)?
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Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
Posted Date:
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