Bruce & Co. expects its EBIT to be $149,000 every year forever. The firm can bor

Question

Bruce & Co. expects its EBIT to be $149,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 34 percent. Bruce will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization

Bruce & Co. expects its EBIT to be $149,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 34 percent. Bruce will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization

Explanation / Answer

V1 = 149000 * (1-.34)/.18 = 546333.33

V2= 546333.33+.34*61000 = $ 567,073.33

Re = .18 + (.18-.11)*(61000/(567073.33 - 61000))*(1-.34) = 0.1855

WACC = 0.1855*(567073.33-61000)/567073.33 + 0.11*(1-.34)*(61000/567073.33)

= 0.1655 + .0078 = 0.1733 or 17.33%

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