Question: Question 3 (20 marks) (a) Elzear & Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7 percent. Elzear

$Question 3 (20 marks) (a) Elzear \& Co. expects its EBIT$

Question 3 (20 marks) (a) Elzear \& Co. expects its EBIT to be $74,000 every year forever. The firm can borrow at 7 percent. Elzear currently has no debt, and its cost of equity is 12 percent and the tax rate is 35 percent. The company borrows $125,000 and uses the proceeds to repurchase shares. What is the cost of equity of the firm after recapitalization? (10 marks) What is the WACC of the firm after recapitalization? Is it higher or lower than the cost of equity without debt? Please explain the reason. (5 marks) (b) Pete is the CFO of Dexter International. He would like to increase the debt-equity ratio of the firm but is concerned that the firm's shareholders may not be willing to accept additional financial leverage. Pete has come to you for advice. What is your recommendation

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