Certiz Enterprises is considered a major recapitalization. The firm currently has a market value of $ 1billion, a debt to capital ratio of 10%, a beta of 0.90 and a pre-tax cost of borrowing of 7%. It is considering tripling its debt to capital ratio to 30% and it believes that doing so will increase its firm value by 15%. The firm has a tax rate of 40%, the riskfree rate is 6% and the market risk premium is 4%. What will the cost of debt have to be at the 30% debt to capital ratio for firm value to increase by 15%. (You can assume a 5% growth rate in savings in perpetuity)
Certiz Enterprises is considered a major recapitalization. The firm currently has a market value of $ 1billion, a debt to capital ratio of 10%, a beta of 0.90 and a pre-tax cost of borrowing of 7%. It is considering tripling its debt to capital ratio to 30% and it believes that doing so will increase its firm value by 15%. The firm has a tax rate of 40%, the riskfree rate is 6% and the market risk premium is 4%. What will the cost of debt have to be at the 30% debt to capital ratio for firm value to increase by 15%. (You can assume a 5% growth rate in savings in perpetuity)
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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M2
![Certiz Enterprises is considered a major
recapitalization. The firm currently has a market
value of $ 1billion, a debt to capital ratio of 10%, a
beta of 0.90 and a pre-tax cost of borrowing of 7%.
It is considering tripling its debt to capital ratio to
30% and it believes that doing so will increase its
firm value by 15%. The firm has a tax rate of 40%,
the riskfree rate is 6% and the market risk premium
is 4%. What will the cost of debt have to be at the
30% debt to capital ratio for firm value to increase
by 15%. (You can assume a 5% growth rate in
savings in perpetuity)
i
i need it asap](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1d0fdcc1-789f-487a-b9a6-3cd22fdf1b3e%2Fa6cfa3d8-ac2e-4b88-a238-1e09ce9a67d0%2Flqqu4hn_processed.jpeg&w=3840&q=75)
Transcribed Image Text:Certiz Enterprises is considered a major
recapitalization. The firm currently has a market
value of $ 1billion, a debt to capital ratio of 10%, a
beta of 0.90 and a pre-tax cost of borrowing of 7%.
It is considering tripling its debt to capital ratio to
30% and it believes that doing so will increase its
firm value by 15%. The firm has a tax rate of 40%,
the riskfree rate is 6% and the market risk premium
is 4%. What will the cost of debt have to be at the
30% debt to capital ratio for firm value to increase
by 15%. (You can assume a 5% growth rate in
savings in perpetuity)
i
i need it asap
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