Volunteer Fabricators, Inc. (VF) currently has zero debt. It is a zero growth co
ID: 2763468 • Letter: V
Question
Volunteer Fabricators, Inc. (VF) currently has zero debt. It is a zero growth company, and it has the data shown below. Now the company is considering using some debt, moving to the market value capital structure indicated below. The money raised would be used to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. EBIT = $80,000 New Debt/Value = 30% Growth = 0% New Equity/Value = 70% Orig cost of equity, rs = 10.0% No. of shares = 10,000 New cost of equity = rs =11.0% Price per share = $48.00 Tax rate = 40% Interest rate = rd = 7.0%
If this plan were carried out, what would be VF's new WACC and its new value of operations?
WACC Value
8.96% $535,714
9.83% $507,884
10.03% $518,041
10.23% $528,402
10.74% $538,970
Show the calculations
8.96% $535,714
9.83% $507,884
10.03% $518,041
10.23% $528,402
10.74% $538,970
Show the calculations
Explanation / Answer
WACC =0.3*7%*(1-.4) + 0.7*11%
=8.96%
Vallue = EBOT(1-t)/WACC
=535714.3
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