Old Exam Questions - Capital Structure and Leverage Page 24 of 31 Pages C. $76.43 D. $83.08 E. $78.81 41. Your company pays all of its after-tax earnings out in the form of dividends and currently has $0 of debt. Its EBIT is $6,000,000, its tax rate is 35 percent, its current cost of equity is 13 percent, and it has 600,000 shares outstanding. As you can calculate, its current price is $50.00 per share. Your company can borrow $6,000,000 of new perpetual debt at a before-tax cost of debt of 4 percent. The increased financial leverage will result in the cost of equity going up to 14 percent. Determine the new price of the stock after a true equilibrium is eventually established, if the firm is able to use the proceeds of the debt issue to buy back $6,000,000 of stock, but investors do not anticipate an increase in value (from the increased leverage) and the firm is able to repurchase stock at the current price. A.
This is the end of the preview. Sign up
access the rest of the document.