Hardmon Enterprises is considering a leverages recapitalization
Not what you're looking for?
Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares.
a. Suppose Hardmon borrow to the point that its debt-equity ratio is .50. With this amount of debt, the debt cost of capital is 6%. What will the expected return of equity be after this transaction?
b. Suppose Hardmon borrows at the debt-equity ratio is 1.50. As a result the debt cost of capital is 8%. What will the expected return of equity?
c. A manager thinks its at the best interest of the shareholder to choose the capital structure that leads to the highest expected return for the stock. What would be your response to that argument?
Purchase this Solution
Solution Summary
The solution examines Hardmon Enterprises which consider a leverages recapitalization. The expected return of equity after the transaction is given.
Solution Preview
a) Cost of unlevered equity = 12%
Cost of Debt =6%
Debt equity ratio = 0.50
Cost of levered equity = cost of unlevered equity +D/E*(Cost of unlevered equity - cost of debt)
=12%+0.5*(12%-6%)=15%
b) Cost of unlevered equity = 12%
Cost of Debt =8%
Debt ...
Purchase this Solution
Free BrainMass Quizzes
Operations Management
This quiz tests a student's knowledge about Operations Management
Basic Social Media Concepts
The quiz will test your knowledge on basic social media concepts.
Marketing Research and Forecasting
The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.
Introduction to Finance
This quiz test introductory finance topics.
Situational Leadership
This quiz will help you better understand Situational Leadership and its theories.