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Calculate the value of the all-equity ly company

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LY company currently has an all equity capital structure. LY has an expected operating income (EBIT) of $12,000. Assume that this EBIT figure is perpetual, that is to say, EBIT will continue at this same level forever. Its cost of equity (which is also its WACC since there is no debt financing currently) is 11.3 percent. LY company has plans to issue $32,500 in debt at a cost of 5.4 percent in order to buy back a same amount of equity currently held by investors in financial markets. Assume for simplicity that there are no taxes. Hence, we are in the "Modigliani Miller with no taxes" world.

(a) Calculate the value of the all-equity LY company. Show calculations

(b) Calculate the value of LY company after it issues $32,500 in debt. Show calculations

(c) Calculate interest expense after the company issues debt. Show calculations

(d) Calculate the cost of equity when the LY company has $32,500 debt. Show calculations

(e) Calculate the portion of EBIT available for equity-holders after the issuance of debt.

(f) Calculate the D/E ratio before and after the issuance of debt. Show calculations in space below.

(g) Calculate the weighted average cost of capital with the new capital structure. Show calculations.

Reference no: EM132473482

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