(25 points) Berkley\'s has expected EBIT of S 19,750 in perpetuity and a tax rat

Question

(25 points) Berkley's has expected EBIT of S 19,750 in perpetuity and a tax rate of35%. Berkley's currently has no debt and its cost of capital is 12%. The firm is considering recapitalization by borrowing $42 800 with an intere trate of 7.5% and using the proceeds to repurchase shares. Given the information, answer the following questions: 2" a. b. c. What is the current value of the company? What will the value of firm be after the recapitalization? What will the cost t of equity and weighted average cost of capital be after recapitalization?

Explanation / Answer

Current Value of ocmpany EBIT      19,750.00 Tax rate 35% Tax      (6,912.50) Earning after tax      12,837.50 Cost of equity 12% Current Value of company =12837.50/12%    106,979.17 In recapitalization EBIT      19,750.00 Less Interest-42800*7.5%      (3,210.00) EBT      16,540.00 Tax rate 35% Tax      (5,789.00) Earning after tax      10,751.00 Cost of equity 12% Value of equity =10751/12% Value of equity            89,592 Value of Debt            42,800 Value of firm          132,392 After recapitalization Value Weight Cost Weighted cost Equity            89,592 0.676717 12.00% 8.12% Debt            42,800 0.323283 7.50% 2.42%          132,392                 1 10.55%

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