Find the cost of equity after the capital structure change

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Question - In an M&M world with taxes, Roll Inc. is an all equity firm with an unlevered return of 16%. The value of the unlevered firm is $9,375,000. There are 500,000 shares outstanding. They want to alter their capital structure by issuing $1,600,000 in debt that will be used to repurchase stock. The return on debt is 7%. Tax rate is 25%.

Required -

a) Find the cost of equity after the capital structure change.

b) How many shares can they repurchase?

Reference no: EM132767856

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