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(capital structure) You have been asked to avaluate the capital structure decisions made by the company xzy. You have the following information about the company. The firm has 10 million shares, currently trading at 8€ per share. The company is unleveraged, e.g it doesn't use any external financing. The risk free rate is (Rf) is currently 4%, the market risk premium is estimated to be 6%. The beta of the stock equal to 0.80. The marginal tax rate is 40%
a) Find the company's cost of capital (WACC)
Now the company is planning to change its capital structure in favour of higher leverage. The company is going to buy back 4 million shares at current market price. The stock buyback is financed by the new dept issue. The company's dept rating is going to be Baa1 and the corresponding default spread over the risk free rate is going to be 1,60%. As the leverage increases, the leveraged beta of the company will be 1.04.
b) Find the new cost of equity, cost of dept and the company's cost of capital (e.g. WACC)
c) Should the company change its capital structure and why?
Kolby’s Korndogs is looking at a new sausage system with an installed cost of $538,000. This cost will be depreciated straight-line to zero over the project’s four-year life, at the end of which the sausage system can be scrapped for $114,000. If the..
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MM Entreprises stock trades for $52.50 per share. It is expected to pay $2.50 dividend at yearend, and the dividend is expected to grow at a constant rate of 5.50% a year. The before tac cost of debt is 7.50% and the tax rate is 40%. The target capit..
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