What is the firm’s weighted average cost of capital? b. Suppose the firm can increase its debt so that its capital structure has 50% debt, based on market values (it will issue debt and buy back stock). At this level of debt, its cost of equity rises to 17.5% and its interest rate on all debt will rise to 13% (it will have to call and refund the old debt). What is the WACC under this capital structure? What is the total value? How much debt will it issue, and what is the stock price after the repurchase? How many shares will remain outstanding after the repurchase?
The Rogers Company is currently in this situation: (1) EBIT = $5.7 million; (2) tax rate, T = 35%; (3) value of debt, D = $2.5 million; (4) rd = 12%; (5) rs = 14%; (6) shares of stock outstanding, n = 600,000; and stock price, P = $30. The firm’s market is stable and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds.
a. What is the firm’s weighted average cost of capital?
b. Suppose the firm can increase its debt so that its capital structure has 50% debt, based on market values (it will issue debt and buy back stock). At this level of debt, its
Weighted Average cost of Capital:
- It is the cost for the company to raise capital from different sources of finance. It is computed from the sum of the individual cost of capital weighted proportionally.
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