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.© BrainMass Inc. brainmass.com March 22, 2019, 2:05 am ad1c9bdddf
In this solution Value of the firm and the WACC is calculated after introduction of debt into the capital structure.