Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9 percent. Bruce currently has no debt, and its cost of equity is 16 percent. If the tax rate is 35 percent what is the value of the firm? What will the value be if Bruce borrows $135,000 and uses the proceeds to repurchase shares? what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm' s capital structure decision?
Bruce & Co. expects its EBIT to be $185,000 every year forever. The firm can borrow at 9 percent. Bruce currently has no debt, and its cost of equity is 16 percent. If the tax rate is 35 percent what is the value of the firm? What will the value be if Bruce borrows $135,000 and uses the proceeds to repurchase shares? what is the cost of equity after recapitalization? What is the WACC? What are the implications for the firm' s capital structure decision?
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:homework for MM with taxes
1. Short Answer
Bruce & Co. expects its EBIT to be
$185,000 every year forever.
The firm can borrow at 9 percent. Bruce
currently has no debt, and its cost of
equity
is 16 percent. If the tax rate is 35 percent,
what is the value of the firm? What will
the value be if Bruce borrows $135,000
and uses the proceeds to repurchase
shares?
what is the cost of equity after
recapitalization? What is the WACC?
What are the implications for the firm' s
capital structure decision?
Transcribed Image Text:2. Short Answer
Williamson, Inc., has a debt-equity ratio of
2.5. The firm's
weighted average cost of capital is 10
percent, and its pretax cost of debt is 6
percent.
Williamson is subject to a corporate tax
rate of 35 percent.
a. What is Williamson' s cost of equity
capital?
b. What is Williamson' s unlevered cost of
equity capital?
c. What would Williamson' s weighted
average cost of capital be if the firm' s
debt-
equity ratio were .75? What if it were 1.5?
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