What is cost of equity after recapitalization

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Marthas Grapvines Inc. is 100% equity finaning and has an expected perpetual EBIT = $4,000. The firm’s cost of equity is 15%. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt will be used to repurchase equity. The cost of debt is 10% and the tax rate is 30 percent.

(a) What is the value of the firm under current capital structure of 100% equity financing?

(b) What will the value be if Marthas Grapvines Inc. borrows $8,800 and uses the proceeds to repurchase shares?

(d) What is the weighted average cost of capital (WACC) after recapitalization?

Reference no: EM131932727

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