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Problem: Azprom Inc. is a pharmaceutical company with 100 million shares trading at $10 per share and debt outstanding of $ 250 million. The firm has a levered beta of 1.00 and a pre-tax cost of debt of 4.5%. The risk free rate is 3.5%, the marginal tax rate is 40% and the market risk premium is 5%.
Required:
Question 1: Estimate the current cost of capital for the firm.
Question 2: Now assume that the firm plans to borrow $ 500 million and use the proceed to buy back stock, estimate the new cost of capital for the firm after the recapitalization. (Assume there are no changes in the value of initial debt of $250 million)
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