Reference no: EM132789474

Ardent Corporation currently has 20 million shares outstanding with a current price of USD 45 per share. Ardent also has debt with a market value of USD 300 million and an expected return of 6%. Ardent is expected to have FCF by the end of this year of USD 90 million, and its FCF is expected to grow at a 4.5% rate forever. Investors expect Ardent to maintain its current debt-equity ratio in the future. The firm has no excess cash on its balance sheet. Ardent pays a corporate tax rate of 40%. The current risk-free rate is 6% at all maturities, and the current expected return of the market portfolio is 11%.

1) What is Ardent's weighted-average cost of capital?

2) What is the expected return of Ardent's equity (given its current capital structure)?

3) Ardent proposes to issue new debt and repurchase existing shares, increasing its debt-equity ratio to 1:1. To comply with the covenants on their existing debt, they have to first repurchase all of the outstanding debt at its market value, and to then issue (more) new debt. With this increase in debt, the expected return on Ardent's debt will rise to 7.5%. Absent any imperfections other than taxes, what is the effect of this change in capital structure on Ardent's enterprise value? What will happen to Ardent's share price on the announcement of this change in capital structure?