Question

Bruce & Co. expects its EBIT to be $74,000 every year forever. The company can borrow at 7 percent. The company currently has no debt, its cost of equity is 12 percent, and the tax rate is 35 percent. The company borrows $125,000 and uses the proceeds to repurchase shares.

  

What is the cost of equity after recapitalization? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

Cost of equity

%

  

What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

WACC

%

Answer 1

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A e W 2 v * 04-06 ENG 28-02-2020 22 w Formula Bary Y Z AA AB AC a 1325 12% 74000 35% 400833.33 1326 1327 444583.33 U1321 X fx TU 1321 1322 1323 1324 r = EBIT tax VALUE OF ALL EQUITY FIRM = VU = EBIT(1-t)/r0 = 74000(1-0.35)/0.12 = 1328 1329 THE VALUE OF FIRM AFTER ISSUING DEBT = VALUE OF LEVERED FIRM = VL 1330 VL = VU + DEBT (TAX RATE) 1331 VL = 400833.33 + 125000(0.35) = 1332 1333 VALUE OF DEBT = B = 1334 VALUE OF EQUITY = S = VL-B 1335 1336 COST OF EQUITY CAPITAL AFTER RECAPITALISATION rs = r0+ (B/S)(ro-rb)(1-t) 1338 rs =12%+(125000/319583.33)*(12%-7%)*(1-0.35) = 1339 1340 WACC = (Ws)*(rs) +(Wd)*(rd)*(1-t) 1341 WACC = (319583.33/444583.33)*(13.27%) +(125000/444583.33)*(7%)*(1-0.35) = 1342 1343 1344 ... pv, tv, annuity CAP STRU VALUE PM, PMT loan with points LOCK BOX DILUTION DOLLAR COST AVG 125000 319583.33 1337 13.27% 10.82% EXPO NPER APR CPI ear FVA S2 pva :... :