Company P is a regional pizza restaurant chain. The given details are as follows, EBIT is $50 million, Tax rate is 40%, Risk-free rate of return is 6%, Market risk premium is 6%, Outstanding shares 10 million. As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock. To discuss: Working process of capital structure theory and the lessons learned by person X from this theory and make sure address with MM model.

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Chapter 15, Problem 6MC

Summary Introduction

Case summary:

Company P is a regional pizza restaurant chain. The given details are as follows,

EBIT is $50 million,

Tax rate is 40%,

Risk-free rate of return is 6%,

Market risk premium is 6%,

Outstanding shares 10 million.

As of now company is financed with equity only, there is no debt. Now, the company wanted to raise capital by using some debt. When the company were to recapitalize, then debt would be issued, and funds received would be used as repurchase stock.

To discuss: Working process of capital structure theory and the lessons learned by person X from this theory and make sure address with MM model.

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