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Levered Brothers, Inc. has a debt/equity ratio, D/E (in market value terms), of one. The company's debt has a yield to maturity of 6%. The cost of equity is 14%. The corporate tax rate for the company, TC , is 40%. The company is expected to generate annual free cash flows of $215 million, every year indefinitely.
Suppose now that a private equity firm buys all of Levered Brothers' equity as part of a leveraged buyout. Levered Brothers' debt remains the obligation of the company, and the newly-private company also issues enough new debt to raise the company's debt-to-enterprise value ratio to 80%. What will be Levered Brothers' new weighted average cost of capital, RWACC, after the buyout?
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