Omega Corporation has 11.2 million shares outstanding, no debt, and an expected rate of return to shareholders of 12.00%. Now, the firm issues $190 million of bonds rated AAA yielding 9%. The firm invests the funds raised in new assets of identical risk to the firm’s initial assets. After the debt issue, the firm’s shares trade at $53 per share. Assume the firm pays taxes at a marginal rate of 35% and continuously rebalances leverage. Calculate Omega’s cost of equity capital (rE) and after-tax WACC after the debt issue?

Omega Corporation has 11.2 million shares outstanding, no debt, and an expected rate of return to shareholders of 12.00%. Now, the firm issues $190 million of bonds rated AAA yielding 9%. The firm invests the funds raised in new assets of identical risk to the firm’s initial assets. After the debt issue, the firm’s shares trade at $53 per share. Assume the firm pays taxes at a marginal rate of 35% and continuously rebalances leverage. Calculate Omega’s cost of equity capital (rE) and after-tax WACC after the debt issue?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter15: Dividend Policy

Section: Chapter Questions

Problem 4P

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