Reference no: EM132768400

Question - Terck, a leading pharmaceutical company, currently has a balance sheet that is as follows: Liability: Long-term bonds $1,000, Equity $1000, Total $1,000. Assets: Fixed Assets $1700, Current assets $300, Total $1,000. This firm income statement looks as follows: Revenue $1000, COGS $400, Depreciation $100, EBIT $500, Long-term interest expense $ 100, EBT $400, Taxs $200, Net Income $ 200. The firm's bonds are all 20 years bonds with a coupon rate of 10% that are selling at 90% of face value (the yield to maturity on these bonds is 11%). The stock are selling at a P/E ratio of 9 and have a beta of 1.25. The risk-free rate is 6%.

a. What is the firms' current cost of equity?

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

c. What is the firms current weighted average cost of capital? Assume that management of Terek, which is very conservative, is condidering doing an equity-for-debt swap (ie. 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 firms new cost of equity?

e. What is the new WACC?

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