BMGT 340 Study Guide - Midterm Guide: Capital Structure, Interest Expense, Weighted Arithmetic Mean

• School: University of Maryland
• Department: Business and Management
• Course: BMGT 340
• Professor: Karen Hallows

Document Summary

A firm has no debt, a perpetual ebit of ,000 and a cost of equity of 8%. The firm"s market (and book) value of assets is ,000 and the tax rate is 40%. The firm has 1,000 shares of common stock outstanding. The firm is going to finance itself using 50% debt in its new capital structure with an interest rate of 5%. The cost of equity will rise to 10% when this change takes place. What is the firm"s new stock price after the recapitalization: , , , , . Explanation: a: vu = 3000 x . 6 / . 08 = 60,000 (students really don"t need to do this the value of assets and therefore equity is given). 500 = 500 new shares, stock price = 39000/500 = . Firm xyz is assessing a new investment project, adding an additional division. The firm value is . 8 million, with 40% debt level and the cost of debt is 3. 7%.