Vader Enterprises stock has dropped 50% to $6 a share; there are 100 million shares outstanding. The firm also has $1.4 billion (market value) in debt outstanding (with an interest rate of 12%) and reported earnings before interest and taxes of $ 300 million last year; the book value of capital of the firm is $4 billion. The firm currently has a beta of 1.80, the risk free rate is 5% and the market risk premium is 4%; the tax rate is 40%. The CEO takes issues new equity, reduces the market debt to capital ratio to 40% and reduces the interest rate on debt to 8%. Estimate the new cost of capital
Vader Enterprises stock has dropped 50% to $6 a share; there are 100 million shares outstanding. The firm also has $1.4 billion (market value) in debt outstanding (with an interest rate of 12%) and reported earnings before interest and taxes of $ 300 million last year; the book value of capital of the firm is $4 billion. The firm currently has a beta of 1.80, the risk free rate is 5% and the market risk premium is 4%; the tax rate is 40%. The CEO takes issues new equity, reduces the market debt to capital ratio to 40% and reduces the interest rate on debt to 8%. Estimate the new cost of capital
Chapter14: Distributions To Shareholders: Dividends And Repurchases
Section: Chapter Questions
Problem 12P
Related questions
Question
Y7
![Vader Enterprises stock has dropped 50% to $ 6 a share; there are
100 million shares outstanding. The firm also has $1.4 billion (market
value) in debt outstanding (with an interest rate of 12%) and reported
earnings before interest and taxes of $ 300 million last year; the book
value of capital of the firm is $4 billion.
The firm currently has a beta of 1.80, the risk free rate is 5% and the
market risk premium is 4%; the tax rate is 40%. The CEO takes issues
new equity, reduces the market debt to capital ratio to 40% and
reduces the interest rate on debt to 8%. Estimate the new cost of
capital](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F460366c4-1a7f-49ee-848b-02eb8b202968%2Fdd69b4b2-8aab-401d-bb50-b5ade28d31c1%2Fj1qguci_processed.png&w=3840&q=75)
Transcribed Image Text:Vader Enterprises stock has dropped 50% to $ 6 a share; there are
100 million shares outstanding. The firm also has $1.4 billion (market
value) in debt outstanding (with an interest rate of 12%) and reported
earnings before interest and taxes of $ 300 million last year; the book
value of capital of the firm is $4 billion.
The firm currently has a beta of 1.80, the risk free rate is 5% and the
market risk premium is 4%; the tax rate is 40%. The CEO takes issues
new equity, reduces the market debt to capital ratio to 40% and
reduces the interest rate on debt to 8%. Estimate the new cost of
capital
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
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 3 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Recommended textbooks for you