Value after swap and how much of that value will be equity

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Reference no: EM131347687

Frogs Inc., currently has an equity beta of 2.84, is financed with 10% debt (and 90% equity) and has a total firm value of $10 billion. Frogs’ CFO thinks that they should increase the firm’s leverage by issuing $2 billion of debt and buying back $2 billion of equity. This debt will be perpetual and have yield of 7%. The expected return on the market is 13% and the risk free rate is 3%. Frogs has a 35% tax rate.

A) What is Frogs’ value after the swap, and how much of that value will be equity?

B) Using the beta-adjustment approach calculate the return that Frogs’ stockholders expect to earn after the swap?

C) Explain why the cost of equity in (b) differs from the original amount? (one sentence).

Reference no: EM131347687

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