Reference no: EM132967907
Question - Tiger Corp. currently has a debt-to-value ratio (D/V) of 0.35. Their cost of debt (rD) is 8% and the company's equity beta is 1.5. The risk-free rate is 5%, and the expected market risk premium (rM - rf) is 10%. The current market value of the firm (i.e., debt plus equity) is $100 million, and there are 1 million shares outstanding. Assume all debt is perpetual. Ignore taxes and all other market frictions.
1. What is the weighted average cost of capital for Tiger Corp.?
The CEO suggests that the company needs to increase their debt-to-value ratio to 45% by issuing bonds and repurchasing shares. As a result of this restructuring, the cost of debt will rise to 10%.
2. How much additional debt does Tiger need to issue?
3. At what price will the shares be repurchased? How many shares will be repurchased?
4. What will the company's WACC be after the restructuring?
5. What is the new cost of equity capital?
6. Are equity holders better off after this financing transaction? Why or why not?
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