How leverage can be advantageous to common shareholders

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Question 1: Adrian Tutoring (AT), a private company, has 500,000 shares outstanding with no debt AT's current EBIT of $500,000 is not expected to grow in the near future. 1. IfAT's stock price is $8 and tax-rate is 30% then estimate AT's weighted-average cost of capital (WACC).

Question 2: AT is considering to sell $1M of bonds and simultaneously buyback shares. 2. Assuming debt-rate of 7%, determine the following after restructuring: Enterprise Value, Share Price and WACC .

Question 3: Based on above , discuss how leverage can be advantageous and disadvantageous to common shareholders.

Question 4: List three Advantages and three Disadvantages if AT were to become a Public Company.

Question 5: Now suppose that AT has $400,000 of preferred shares outstanding that have a yield of 8% on par and are callable at a 5% premium. If new issues will incur 2 0/0 flotation costs , then at what interest rate would AT refinance?

Reference no: EM132941496

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