A company is financed entirely by equity and has a beta of 1.0. Its cost of equity is 14%. The company decides to repurchase (buy back) half of its shares and raise an equal value of debt. The company plans to maintain this capital structure thereafter. The debt is risk-free and carries an interest rate of 7%. The company is subject to an income tax rate
A company is financed entirely by equity and has a beta of 1.0. Its cost of equity is 14%. The company decides to repurchase (buy back) half of its shares and raise an equal value of debt. The company plans to maintain this capital structure thereafter. The debt is risk-free and carries an interest rate of 7%. The company is subject to an income tax rate
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:A company is financed entirely by equity and has a
beta of 1.0. Its cost of equity is 14%. The company
decides to repurchase (buy back) half of its shares
and raise an equal value of debt. The company
plans to maintain this capital structure thereafter.
The debt is risk-free and carries an interest rate of
7%. The company is subject to an income tax rate
of 25%.
i. Calculate the weighted average cost of capital
before the refinancing.
ii. Calculate the cost of equity after the refinancing.
iii. Calculate the weighted average cost of capital
after the refinancing. iv. Calculate the stock's beta
after the refinancing.
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