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Linexy is an all-equity firm where annual sales are expected to be $100 million in perpetuity. The firm estimates its cost of production will be 65% of sales. The stock’s beta is currently 1.30 and faces a 30% tax rate. Further, there are 5 million shares outstanding. The current yield-to-maturity on T-Bills is 2.7%, and the market risk premium is 7%. The firm is considering buying back $50 million of equity by issuing debt. The firm can issue debt at 8%. Post recapitalization, what is the value of:
1. The firm
2. The firm’s equity?
SHOW ALL WORKING AND STEPS
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