O’Connell & Co. expects its EBIT to be $91,000 every year forever. The firm can

Question

O’Connell & Co. expects its EBIT to be $91,000 every year forever. The firm can borrow at 4 percent. O’Connell currently has no debt, and its cost of equity is 9 percent and the tax rate is 35 percent. The company borrows $136,000 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))

O’Connell & Co. expects its EBIT to be $91,000 every year forever. The firm can borrow at 4 percent. O’Connell currently has no debt, and its cost of equity is 9 percent and the tax rate is 35 percent. The company borrows $136,000 and uses the proceeds to repurchase shares.

Explanation / Answer

Detail Amount EBIT $91,000.00 PAT $59,150.00 Cost of Equity 9% Value of the Firm $6,57,222.22 After Tax Cost of Debt 2.60% Value of the Debt $1,36,000.00 Revised Cost Of Equity EBIT $91,000.00 Interest -$5,440.00 PBT $85,560.00 Tax $29,946.00 PAT $55,614.00 Value of the firm attributable to equity $5,21,222.22 Cost of Equity 10.7% WACC Cost Weightage(Market Value) Equity 10.67% $5,21,222.22 8.46% Borrowings 2.60% $1,36,000.00 0.54% WACC 9.00%

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