Xerxes Industries is a zero-growth company that currently has zero debt, and it has the data shown below. Now the company is considering using some debt, moving to the market value capital structure indicated below. The money raised would be used to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below.
EBIT = $63,000 New Debt/Firm Value = 20%
Growth = 0% New Equity/Firm Value = 80%
Orig. Cost of Equity, rs = 10% No. of shares = 10,000
New cost of equity rs = 11% Price per share = $48
Tax rate = 40% Interest rate rd = 7%
If this plan were carried out, what would be the firm's new WACC AND its new value of operations (V)? [Hint: for a no-growth firm, value =FCF/WACC where FCF = NOPAT]
Xerxes Industries is a zero-growth company that currently has zero debt, and it has the data shown below. Now the company is considering using some debt, moving to the market value capital structure indicated below. The money raised would be used to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below.
EBIT = $63,000 New Debt/Firm Value = 20%
Growth = 0% New Equity/Firm Value = 80%
Orig. Cost of Equity, rs = 10% No. of shares = 10,000
New cost of equity rs = 11% Price per share = $48
Tax rate = 40% Interest rate rd = 7%
If this plan were carried out, what would be the firm's new WACC AND its new value of operations (V)? [Hint: for a no-growth firm, value =FCF/WACC where FCF = NOPAT]
