The
Doggy Daycare has $750 debt outstanding with pretax cost of 6 percent and its
common stock has a market value of $1,250.
Doggy Daycare’s equity beta is currently 1.77.
Doggy Daycare faces a corporate tax rate of 35 percent. The current risk free rate is 0.2 percent
while the expected equity market risk premium is 8 percent. All work must be shown step by step in excel
a.
Calculate
Doggy Daycare’s current cost of equity?
b.
What
is Doggy Daycare’s weighted average cost of capital?
c.
What
is Doggy Daycare’s EBIT? Assuming the EBIT is a
constant perpetuity.
d.
Calculate
Doggy Daycare’s unlevered cost of equity?
e.
Doggy Daycare
is recapitalizing by issuing $250 in debt and using the proceeds to buy back
stock. What is the new value of the
firm’s debt and equity?
f.
After
the recapitalization, what is Doggy Daycare’s required return on equity and WACC?
g.
Doggy Daycare
now announces instead of issuing $250 in debt, the firm will reduce leverage by
issuing $250 of equity and buyback $250 of debt. What is the value of the firm’s debt and
equity under this scenario?
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