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Calculate the new value of the business

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Question: The Chief Financial Officer (CFO) of the Q13.92T Company is interested to identify the cost of capital and value of the company. Currently, the Q13.92T is an all-equity company. Earnings before interest and taxes (EBIT) for the company is expected to be $75,166 forever, and the cost of capital is currently 13.92 percent. The corporate tax rate applicable to this company is 34.1 percent.

You need to show necessary workings.

A. Calculate the market value of Q13.92T.

B. Suppose Q13.92T floats a $34,387 debt issue and uses the proceeds to reduce share capital. The interest rate is 9.26 percent. Calculate the new value of the business.

C. Calculate the new value of equity.

D. Calculate the cost of equity of Q13.92T after the debt issue.

E. Calculate the weighted average cost of capital.

F. What are the implications for capital structure?

Reference no: EM132757317

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