Company unlevered cost of equity capital

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Reference no: EM131633458

Caviar Fishfarm Ltd ('CFL') is unlevered, has an equity beta of 1.25 and unlevered cash flows of $76,800 per annum that will continue in perpetuity. The expected market return is 10%p.a and Treasury bills earn 2%p.a. CFL is currently considering issuing $300,000 in new debt with an 8% interest rate. CFL would repurchase $300,000 of its own shares, using the proceeds of the debt issue. There are currently 32,000 shares outstanding and the company's effective marginal tax rate is 34%.

a) Calculate the company's unlevered cost of equity capital.

b) Calculate the value of a share in the company before it announces the capital restructure.

c) Assuming the company completes the restructure:

i. Calculate the value of each share in the company, after the restructure is complete.

ii. Calculate the levered cost of equity capital  iii. Calculate the new WACC

Reference no: EM131633458

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