Lecture_19_Minicase

Lecture_19_Minicase - Mini-Case and Solution Lecture 19...

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Mini-Case and Solution: Lecture 19 Correction: The starting market price is $25 (the case delivered in class says $41.67) You have just been hired as business manager of TacoPalace, a taco restaurant on Broad Street. The company’s EBIT was $500,000 last year, and since the university enrollment is capped, EBIT is expected to remain constant over time (no expansion or growth). The firm is currently financed with all equity, it has 100,000 shares outstanding, and the stock is traded in the over-the-counter market. The current market price is $25 per share. The book value of equity is $2,000,000. According to what you learned from FINA4200, you told your new boss, Belinda, that using some debt could potentially increase firm value. She encouraged you to pursue the idea. As the first step, you talked to a local investment banker about the three possible capital structures and obtained the following estimated costs of debt: Percent Debt R d 0% -- 30% 8.5% 50% 10% TacoPalace is in the 40% tax bracket, and its current beta is 1.0. Risk free rate is 6%, and market risk premium is 6%.
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