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What will the cost of equity be

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Q1. Alderanian's is an all-equity firm that has 200,000 shares of stock outstanding. Neal, the financial vice president, is considering borrowing $300,000 at 8.5% interest rate to repurchase 50,000 shares. Ignoring taxes, what is the current value of the firm?

Q2. An all-equity firm has a return on assets of 17.5%. The firm is considering converting to a debt-equity ratio of 0.40. The pretax cost of debt is 7.5%. Ignoring taxes, what will the cost of equity be if the firm switches to the levered capital structure?

Q3. Flour Mills is an all-equity firm with a total market value of $891,860. The firm has 38,000 shares of stock outstanding. Management is considering issuing $275,000 of debt at an interest rate of 7.5% and using the proceeds on a stock repurchase. Ignore taxes. How many shares can the firm repurchase if it issues the debt securities? (Round the number of shares repurchased down to the nearest whole share.

Q4. Destruction Builders has 10,000 shares of stock outstanding and no debt. The new CFO is considering issuing $65,000 of debt and using the proceeds to retire 750 shares of stock. The coupon rate on the debt is 7.2%. If taxes are ignored, what is the break-even level of earnings before interest and taxes between these two capital structure options?

Reference no: EM133159489

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