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What will be the stock price if the firm first recapitalizes

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Aaron Corp. is all-equity financed and expects zero growth. The expected EBIT = $500,000, Tax rate = 40%, 100,000 shares outstanding. If the company recapitalizes, debt would be issued to repurchase stock.

Debt Percent (Wd)         Equity Percent (We)            Before-tax cost of debt (rd)
0.20                                   0.80                                   8.2%
0.30                                    0.70                                  8.3%

Question 1: The company uses the CAPM to estimate its cost of common equity. The risk-free rate is 5 percent and the market risk premium is 6 percent. Its "unlevered beta," bU, equals 1.6. What will be the stock price if the firm first recapitalizes to 20% debt, then does again to 30% debt?

Reference no: EM132893562

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