Business, 24.04.2020 00:55 tia3963

New co. is considering a change in its capital structure. New co. currently has $20 million in debt carrying a rate of 8%, and its stock price is $40 per share with 2 million shares outstanding. Assume no growth and pays all of its earnings as dividends. EBIT is $14.933 million, and tax rate is 40%. The market risk premium is 4%, and the risk free rate is 6%. New co. is considering increasing its debt level to a capital structure with 40% debt, and repurchasing shares with the extra money that it borrows. New co. will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 9 %. New co. has beta of 1.0.

4. What is New co's unlevered beta? Use market value D/S when levering.
5. What are New co's new beta and cost of equity if it has 40 percent debt?
6. What are New co's WACC and total value of the firm with 40% debt?
7. Describe the MM theory of capital structure. Also explain trade off theory and pecking order theory.

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New co. is considering a change in its capital structure. New co. currently has $20 million in debt...