The Nantucket Nugget's current debt-to-equity ratio is 40% and pays no taxes. The firm currently has $4
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The Nantucket Nugget's current debt-to-equity ratio is 40% and pays no taxes. The firm currently has $4 million worth of debt outstanding. Nantucket is considering increasing its debt-to-equity ratio to 50%. To achieve this goal, it will issue additional debt with an 8% interest rate and repurchase shares of stock with the proceeds of the debt issue.
- What is the market value of the firm before and after the share repurchase? How much new debt the firm must issue to achieve its goal?
- If the firm's expected cost of equity before the share repurchase is 12%, what will Nantucket's new expected cost of equity be (after share repurchase)?
- Will the firm's WACC change after the share repurchase? Why or why not?
- If the firm has a tax rate of 35%, describe how would this change your answers in parts a) and c).
Related Book For
Corporate Finance
ISBN: 9780077173630
3rd Edition
Authors: David Hillier, Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Jeffrey F. Jaffe
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