(Solution Document) Assume the following: An all-equity firm is expecting FCF in perpetuity of $1,00


Assume the following:

An all-equity firm is expecting FCF in perpetuity of $1,000,000

The stock has a beta of 1.5

The firm has a marginal tax rate of 35%

The firm has 250,000 shares outstanding

The YTM on 90-day Treasury bills is 2%

The expected market risk premium is 7%



Management is proposing to modify the capital structure from an all-equity position to:

equity 80%

debt 20% (the interest rate on debt would be 5%. Debt proceeds would be used to repurchase stock)

Under the proposed capital structure the beta levered would be:

Under the proposed capital structure the cost of equity would be:

Under the proposed capital structure the WACC would be:

Under the proposed capital structure the enterprise value would be:

Under the proposed capital structure the dollar value of debt would be:

Under the proposed capital structure the dollar value of equity would be:

Under the proposed capital structure the stock price would be:

Under the proposed capital structure the new number of outstanding shares would be:

 







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