O?Connell & Co. expects its EBIT to be $81.000 every year forever. The firm can

Question

O?Connell & Co. expects its EBIT to be $81.000 every year forever. The firm can borrow at 8 percent O?Connell currently has no debt and its cost of equity is 12 percent and the tax rate is 35 percent The company borrows $132000 and uses the proceeds to repurchase shares. What is the cost of equity after recapitalization? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) What is the WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

Proportion of Equity after Recapitalization = 0.70

Proportion of Debt after Recapitalization = 0.30

Cost of Equity After Recapitalization    =12%*0.7 = 8.4%

WACC = 12%*0.7+8%*(1-35%)*0.3

= 9.96%

EBIT 81000 Interest 0 EBT 81000 Tax@35% 28350 Profit after Tax 52650 Cost of Equity 12% Value of Equity= ( Profit after Tax/cost of Equity 438750 After recapitalization Value of Equity 306750 Value of Debt 132000 Total After Recapitalization 438750

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.