Assume fixed debt ratio, What is the company’s cost of

Assume fixed debt ratio

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Reference no: EM131847773

Corporation X is currently all-equity financed. The company is expected to generate a constant €20 million EBIT into perpetuity. EBIT is assumed to occur at the end of each year. The company's cost of capital is 8% and it can borrow at the risk-free interest rate of 2%. The market portfolio is expected to return 6%. Assume an M&M world except that there is a corporate tax rate of 20%.

a) What is the value of Corporation X?

b) What is the beta of its shares?

Suppose Corporation X announces that it will issue €40 million in new debt to repurchase shares. Assume that the announcement was unanticipated and that no further changes in capital structure policy are expected.

c) How much (in percentage) will the company’s share price change assuming the new capital structure policy is:

i. fixed debt ratio?

ii. fixed debt amount?

d) What is the company’s cost of capital (i.e., after-tax WACC) after the transaction is completed? Assume fixed debt ratio.

Reference no: EM131847773

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