Question

Meyer & Co. expects its EBIT to be $75,000 every year forever. The firm can borrow at 10 percent. Meyer currently has no debt, and its cost of equity is 14 percent and the tax rate is 35 percent. The company borrows $152,000 and uses the proceeds to repurchase shares. What is the cost of equity after recapitalization? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity % What is the WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %

Answer 1

Calculate of value of equity before reapplication EBIT rightarrow $75,00 intents Ebt $ 75,000 Tax@35% 26250 Eat $48750 profit available for enquiry s. holder = $48750 value of equity =$48750/14%implies348214.29 now company issue deft $15200 @10% so coast of equality will be? EBIT 75,000 intent 15,200 EBT 59800 ( -)Tax @ 35% 20930/38870 cost of equality = EAT/value of Equity = 38870/(348214.29-152000) = 38870/19214.29 = 0.1981 = 19.81 so WACC = [cost of deft after tax times weight]+[cost of Equality times weight] [10% (1 - 0.35)times 152000/348214.29]+[19.81 times 196214.29/348214.29] [6.5%0.4365]+[19.81% times 0.5635] = 2.8373% + 11.1629% = 14%