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Dorset Inc. has 120 million shares outstanding, trading at $10 per share. The firm is currently debt free, and its unlevered beta is 1.1. The 10-year US Treasury rate is 1.2%, and the equity risk premium is 6%. The firm is going to raise long-term debt to finance a share repurchase to achieve a target Debt to Equity ratio of 30% (based on market values). The borrowing cost is 1.5% plus 10-year US Treasury rate. The tax rate is 25%. Stock price assumptions: Share repurchase price: $10.5 per share Share price after completion of the repurchase: $10 per share
a. Estimate the amount of debt Dorset needs to raise in order to reach its target capital structure.
b. What is the WACC under the target capital structure?
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