A companys debt to equity (D/E) ratio is currently 0.25. It has 2 million shares...
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A companys debt to equity (D/E) ratio is currently 0.25. It has 2 million shares outstanding. According to its most recent Income Statement, the net income is $50 million, the depreciation is $3 million, and the interest expense is $1 million. There will be no purchase or sale of fixed assets, and its working capital is expected to stay constant. Its free cash flow is expected to grow at a constant rate of 4% per year indefinitely. The corporate tax rate of this company is 35%, the cost of equity is 10%, and its cost of debt is 6%. The company plans to raise additional debt to repurchase some shares outstanding. The new target D/E ratio is 0.6. Assume all MM conditions except the corporate tax are satisfied. What is the weighted average cost of capital (WACC)? What is the firms market value before the recapitalization? What are the WACC and market value of the firm after the recapitalization?
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