Assume you have just been hired as a business manager ofPizzaPalace, a regional pizza restaurant chain. The companyâs EBITwas $50 million last year and is not expected to grow. The firm iscurrently financed with all equity, and it has 10 million sharesoutstanding. When you took your corporate finance course, yourinstructor stated that most firmsâ owners would be financiallybetter off if the firms used some debt. When you suggested this toyour new boss, he encouraged you to pursue the idea. As a firststep, assume that you obtained from the firmâs investment bankerthe following estimated costs of debt for the firm at differentcapital structures:
Percent Financed with Debt,
0%
â
20
8.0%
30
8.5
40
10.0
50
12.0
If the company were to recapitalize, then debt would be issuedand the funds received would be used to repurchase stock.PizzaPalace is in the 40% state-plus-federal corporate tax bracket,its beta is 1.0, the risk-free rate is 6%, and the market riskpremium is 6%.
1. Using the free cash flow valuation model, show the onlyavenues by which capital structure can affect value.
Using complete sentences and academic vocabulary, please answerquestion. Please don't copy from other sources. Thank you
Assume you have just been hired as a business manager ofPizzaPalace, a regional pizza restaurant chain. The companyâs EBITwas $50 million last year and is not expected to grow. The firm iscurrently financed with all equity, and it has 10 million sharesoutstanding. When you took your corporate finance course, yourinstructor stated that most firmsâ owners would be financiallybetter off if the firms used some debt. When you suggested this toyour new boss, he encouraged you to pursue the idea. As a firststep, assume that you obtained from the firmâs investment bankerthe following estimated costs of debt for the firm at differentcapital structures:
Percent Financed with Debt, | |
0% | â |
20 | 8.0% |
30 | 8.5 |
40 | 10.0 |
50 | 12.0 |
If the company were to recapitalize, then debt would be issuedand the funds received would be used to repurchase stock.PizzaPalace is in the 40% state-plus-federal corporate tax bracket,its beta is 1.0, the risk-free rate is 6%, and the market riskpremium is 6%.
1. Using the free cash flow valuation model, show the onlyavenues by which capital structure can affect value.
Using complete sentences and academic vocabulary, please answerquestion. Please don't copy from other sources. Thank you