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Debt, Equity, WACC

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An all equity firm has a required return on its equity of 15%, has 10 million shares outstanding, and pays no taxes. The shares are currently trading at $6.00 each. The firm is planning to borrow $9 million at 5% interest rate and use the borrowed funds to buyback a portion of its equity. Calculate the new value of the firm and the new required return on its equity if it goes through with the capital structure change.

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Solution Summary

In this solution Value of the firm and the WACC is calculated after introduction of debt into the capital structure.

Solution provided by:
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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