Reference no: EM132607426

Question - Ozarko Limited, a leading pharmaceutical company, currently has a balance sheet that is as follows: (All figures presented in thousands of dollars) Liability Assets Long term Bonds $1,000 Fixed Assets $1,700 Equity $1,000 Current Assets $300 Total $2,000 Total $2,000 The firm's income statement looks as follows: Revenues 1,000 Cost of goods sold 400 Depreciation 100 Earnings before interest and tax 500 Long term loan interest 100 Earnings before tax 400 Tax 200 Net income 200 The firm's bonds are all 20-year bonds with a coupon rate of 10% which are selling at 90% of face value (the yield to maturity on these bonds is 11%). The stocks are selling at a P/E ratio of 9 and have a beta of 1.25. The six-month T-Bill rate is 6%.

a. What is the firm's current cost of equity?

b. What is the firm's current after-tax cost of debt?

c. What is the firm's current weighted average cost of capital? Assume that management of Ozarko Limited, which is very conservative, is considering doing an equity-for-debt swap (i.e. issuing $200 more of equity to retire $200 of debt). This action is expected to lower the firm's interest rate by 1%.

d. What is the firm's new cost of equity?

e. What is the new WACC?

f. What will the value of the firm be after the swap?