Purchase Solution

Debt, Equity, WACC

Not what you're looking for?

Ask Custom Question

An all equity firm has a required return on its equity of 15%, has 10 million shares outstanding, and pays no taxes. The shares are currently trading at $6.00 each. The firm is planning to borrow $9 million at 5% interest rate and use the borrowed funds to buyback a portion of its equity. Calculate the new value of the firm and the new required return on its equity if it goes through with the capital structure change.

Purchase this Solution
Solution Summary

In this solution Value of the firm and the WACC is calculated after introduction of debt into the capital structure.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
Recent Feedback
  • "I've posted a similar question for another course. It's post 657940, and it's a practice problem that I'd like to use for the final exam. Your help will be greatly appreciated. "
  • "thank you!"
  • "Thank you again Jayant. You are super fast. "
  • "Thank you Jayant. You are appreciated. "
  • "Again, thank you Jayant. You are wonderful. "
Purchase this Solution
Free BrainMass Quizzes
Balance Sheet

The Fundamental Classified Balance Sheet. What to know to make it easy.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

View More Free Quizzes
Related BrainMass Solutions

  • Rayburn Manufacturing Inc- Repurchase of Stock

    WACC=(D/V) r debt + (E/V) r equity D/V= 0.20 E/V= 0.80 Cost of debt r debt = 10% Cost of equity r equity = 20% WACC= 18% =0.2*10%+0.8*20% (after repurchase) This answer

  • Calculating WACC for a Corporation

    what is shadow's WACC for part b...25 % and 50 %... 25% debt, equity will be equal to 75% WACC = (0.25)(0.08)(1 - 0.35) + (0.75)(0.12) WACC = 0.013 + 0.09 WACC = 0.103 or 10.3% 50% debt, equity will be equal to 50% WACC = (0.50)(0.08)(1

  • WACC

    of debt financing and debt to equity ratio given the WACC

  • Calculating WACC at different capital structures

    If the firm converts to 50 percent debt, what is the company's WACC? a. What is the company's cost of equity? In absence of any debt, Cost of equity =WACC=9.70% b.

  • WACC before and after issue of debt

    135110 Capital Structure, Cost of equity, WACC, market value of the company after it issues the debt, market value of the company's equity after it issues the debt, cost of equity after it issues the debt, new WACC XYZ limited has a capital structure

  • Calculating WACC at different capital structures

    What is the company's cost of equity? In absence of any debt, Cost of equity =WACC=9.20% b. If the firm converts to 35 percent debt, what will its cost of equity be?

  • WACC

    WACC = Proportion of debt X after tax cost of debt + Proportion of equity X cost of equity We are given Proportion of debt = 40% So the proportion of equity = 60% (since total capital is debt + equity) After tax cost of debt = 9% Cost of equity =

  • Calculate WACC; Construct a Pro Forma Balance Sheet

    of debt + Proportion of equity X cost of equity WACC = Debt/Assets X after tax cost of debt + (1-Debt/Assets) X cost of equity For the first row the WACC is WACC = 0% X 8% + (1-0%) X 12% = 12% b.

  • WACC and expected return on equity

    393447 WACC and expected return on equity A firm has a WACC of 12%, $500,000 in 9% debt, $800,000 in equity. Both debt and equity are shown at market values, and the firm pays no taxes.

  • Capital Structure

    r debt + (E/V) r equity D/V= 0.33 E/V= 0.67 Cost of debt r debt = 14% Cost of equity r equity = 17. % WACC= 16% =0.33*14%+0.67*17% Answer: WACC= 16% C- What is the cost of capital for an otherwise identical all-equity firm?

View More Related Solutions