Meyer & Co. expects its EBIT to be $83,000 every year forever. The firm can borr
ID: 2792017 • Letter: M
Question
Meyer & Co. expects its EBIT to be $83,000 every year forever. The firm can borrow at 11 percent. Meyer currently has no debt, and its cost of equity is 15 percent and the tax rate is 35 percent. The company borrows $144,000 and uses the proceeds to repurchase shares.
What is the cost of equity after recapitalization? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
What is the WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Meyer & Co. expects its EBIT to be $83,000 every year forever. The firm can borrow at 11 percent. Meyer currently has no debt, and its cost of equity is 15 percent and the tax rate is 35 percent. The company borrows $144,000 and uses the proceeds to repurchase shares.
Explanation / Answer
VU = $83,000(1 - .35) / .15 = $359,666.67
VL = $359,666.67 + .35($144,000) = $410,066.67
VE = $410,066.67 - 144,000 = $266,066.67
Cost of Equity = RE = .15 + (.15 - .11)($144,000 / 266,066.67)(1 - .35) = .1641
WACC = .1641($266,066.67 / $410,066.67) + .11($144,000 / $410,066.67) (1 - .35) = .1451, or 14.51 percent