Cost of equity before the change in capital structure

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Reference no: EM131899124

XYZ Limited has no debt financing and has a value of $65 million and EBIT of $24.5 million. The firm is planning to change its capital structure by issuing $35 million in debt, and repurchasing $30 million of common stock. The firm is estimated to pay 6.0 percent on interest expense.

a) According to the MM view of corporate taxes, what is the value of the levered firm in millions of dollars if the company’s tax rate is 25 percent?

b) What is XYX’s cost of equity before the change in capital structure?

c) What will be cost of equity of XYZ under the new capital structure?

d) What will be the new firm’s WACC?

Reference no: EM131899124

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