XOM is considering a change in its capital structure. XOM will increase its debt level...
80.2K
Verified Solution
Link Copied!
Question
Finance
XOM is considering a change in its capital structure. XOM will increase its debt level to a capital structure with 50% debt and repurchase shares with the extra money that it borrows. XOM will retire old debt to issue new debt, and the rate on the new debt will be 11%. XOM currently has $40M in debt carrying a rate of 9%, and its stock price is $30 per share with 4 million shares outstanding. XOM is a zero-growth firm and pays all its earnings as dividends. The firms EBIT is $40 million, and its tax rate is 35%. The market return is 13% and risk-free rate is 4%. XOM has a beta of 1.6.
a) What is the XOMs unlevered beta? In all beta levering and un-levering steps apply Hamada Equation.
b) What are XOMs new beta and cost of equity if it has 50% debt?
c) What are XOMs WACC and total firm value with 50% of debt?
d) What is the premium for financial risk attached to Nevada Inc.s equity, given its leverage ratio is 50%? You can use your results from parts (a) and (b) to answer part (d).
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
