Question: Vietcom Trading is a company whose shareholders cannot utilize the franking credits they receive with dividends from the company. The company consistently generates earnings before

Vietcom Trading is a company whose shareholders cannot utilize the franking credits they receive with dividends from the company. The company consistently generates earnings before interest and tax (EBIT) of $3 million and pays tax at the corporate rate of 30%. The company currently is all-equity financed with a cost of equity of 15%. Management is considering issuing $5 million in debt at an interest rate of 10%, to repurchase some of the issued shares.

(i) What is the value of the company with an all-equity capital structure?

(ii) What is the weighted average cost of capital (WACC) of the company with an all-equity capital structure?

(iii) What is value of the company if it borrows the money and uses the proceeds to repurchase shares?

(iv) What is the weighted average cost of capital (WACC) of the restructured company?

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