DDD is an unlevered firm with a cost of capita of 10.7%. The company is considering adding debt to its capital structure to reduce equity. Specifically, the company is evaluating the consequences of adding $4 million in perpetual debt at a pre-tax cost of 5.1%. The firm expects to generate EBIT of $10 million every year into perpetuity. Assume interest expense is tax deductible. The firm pays a tax rate of 35%. Ignore financial distress costs. Based on MM Prop II, what will be DDD's weighted average cost of capital if it takes on the debt?
DDD is an unlevered firm with a cost of capita of 10.7%. The company is considering adding debt to its capital structure to reduce equity. Specifically, the company is evaluating the consequences of adding $4 million in perpetual debt at a pre-tax cost of 5.1%. The firm expects to generate EBIT of $10 million every year into perpetuity. Assume interest expense is tax deductible. The firm pays a tax rate of 35%. Ignore financial distress costs. Based on MM Prop II, what will be DDD's weighted average cost of capital if it takes on the debt?
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:DDD is an unlevered firm with a cost of capita
of 10.7%. The company is considering adding
debt to its capital structure to reduce equity.
Specifically, the company is evaluating the
consequences of adding $4 million in
perpetual debt at a pre-tax cost of 5.1%. The
firm expects to generate EBIT of $10 million
every year into perpetuity. Assume interest
expense is tax deductible. The firm pays a tax
rate of 35%. Ignore financial distress costs.
Based on MM Prop II, what will be DDD's
weighted average cost of capital if it takes on
the debt?
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