Bruce & Co. expects its EBIT to be $89,000 every year forever. The company can b

Question

Bruce & Co. expects its EBIT to be $89,000 every year forever. The company can borrow at 5 percent. The company currently has no debt, its cost of equity is 8 percent, and the tax rate is 35 percent. The company borrows $102,000 and uses the proceeds to repurchase shares. What is the cost of equity after recapitalization? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC

Explanation / Answer

Dear Student Thank you for using Chegg Please find below the answer Statementshowing Computations Paticulars Current EBIT            89,000.00 Interest                            -   EBT            89,000.00 Tax at 35%          (31,150.00) EAT or earning for equity shareholder            57,850.00 Cost of equity 8% Equity = 57,850/8%          723,125.00 Proposed EBIT            89,000.00 Interest = 102000*5%               5,100.00 EBT            83,900.00 Tax at 35%          (29,365.00) EAT or earning for equity shareholder            54,535.00 Equity = 723,125 - 102,000          621,125.00 Cost of equity = 54,535/621,125 8.78% b) WACC = 8.28% Amount weight Cost of capital WACC Equity          621,125.00                  0.8589 8.7800% 7.54% Debt = 8%*(1-.35)          102,000.00                  0.1411 5.20% 0.73%          723,125.00                  1.0000 8.28%

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