UB is examining its capital structure with the intent of arriving at an optimal debt ratio. It currently has no debt and has a beta of 1.5. The riskless interest rate is 9%. Your research indicates that the debt rating will be as follows at different debt levels: D/(D+ E) (%) Rating Interest Rate (%) 0 AAA 10 10 AA 10.5 20 A 11 30 BBB 12 40 BB 13 50 B 14 60 CCC 16 70 CC 18 80 C 20 90 D 22 The firm currently has 1 million shares outstanding at $20 per share (tax rate = 40%). a. What is the firm's optimal debt ratio? b. Assuming that the firm restructures by repurchasing stock with debt, what will the value of the stock be after the restructuring? (with 5% growth in perpetuity)
UB is examining its capital structure with the intent of arriving at an optimal debt ratio. It currently has no debt and has a beta of 1.5. The riskless interest rate is 9%. Your research indicates that the debt rating will be as follows at different debt levels: D/(D+ E) (%) Rating Interest Rate (%) 0 AAA 10 10 AA 10.5 20 A 11 30 BBB 12 40 BB 13 50 B 14 60 CCC 16 70 CC 18 80 C 20 90 D 22 The firm currently has 1 million shares outstanding at $20 per share (tax rate = 40%). a. What is the firm's optimal debt ratio? b. Assuming that the firm restructures by repurchasing stock with debt, what will the value of the stock be after the restructuring? (with 5% growth 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
Related questions
Question
None
Transcribed Image Text:UB is examining its capital structure with the intent of arriving at an optimal debt ratio. It
currently has no debt and has a beta of 1.5. The riskless interest rate is 9%. Your research
indicates that the debt rating will be as follows at different debt levels: D/(D+ E) (%) Rating
Interest Rate (%) 0 AAA 10 10 AA 10.5 20 A 11 30 BBB 12 40 BB 13 50 B 14 60 CCC 16 70
CC 18 80 C 20 90 D 22 The firm currently has 1 million shares outstanding at $20 per share
(tax rate = 40%). a. What is the firm's optimal debt ratio? b. Assuming that the firm
restructures by repurchasing stock with debt, what will the value of the stock be after the
restructuring? (with 5% growth in perpetuity)
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps with 3 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education