Trixilla Inc. is 100% equity financed. The firm is expected to have perpetual BIT of $54 million per year. The unlevered equity or asset Beta is 1.2. The riskless rate is 4%, and the market risk premium is 5%. There are 10 million shares of common stock outstanding. The corporate tax rate is 25%.

A. Calculate the total value of Trixilla as an all equity firm, as well as the stock price.

B. Trixilla announces that it will issue $140 million of perpetual riskless debt at a cost of 4% and repurchase $140 million of equity. Calculate the new total value VL (enterprise

value) of Trixilla as a levered firm, new total value of equity, and the new stock price after this debt for equity exchange is finished.

C. Calculate the new cost of equity and WACC of Trixilla as a levered firm.

Answer rating: 100% (QA)

A To calculate the total value of Trixilla as an all equity firm we can use the following formula VU EBIT rU where VU is the unlevered firm value EBIT is the earnings before interest and taxes and rU ... View the full answer