Asked by
Darius Coley
on Dec 09, 2024
Verified
UNLEV has an expected perpetual EBIT = $4,000. The unlevered cost of capital = 15% and there are 20,000 shares of stock outstanding. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt = 10% and the tax rate = 34%. There are no flotation costs. What is the value of UNLEV after the restructuring?
A) $15,930
B) $17,600
C) $18,519
D) $20,592
E) $22,461
Unlevered Cost of Capital
The cost of capital for a company that has no debt, representing only the cost of equity.
Financial Leverage
The use of borrowed money (debt) to finance the acquisition of assets, with the expectation that the income or capital gain from the new assets will exceed the cost of borrowing.
Par Bonds
Bonds that are issued and redeemed at their face value, or par value, which represents the nominal or dollar value printed on the bond.
- Understand the effect of adding financial leverage on a firm's value.
- Calculate the value of a firm before and after restructuring with and without taxes.
Verified Answer
DN
Learning Objectives
- Understand the effect of adding financial leverage on a firm's value.
- Calculate the value of a firm before and after restructuring with and without taxes.