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Hose plc presently has a capital structure which is 30% debt and 70% equity. The cost of debt before taxes is 8% and for equity 15%. The firm's future cash flows, after tax but before interest, are expected to be perpetuity of €650.000. The takes rate is 40%
Required
a. Calculate the WACC and the value of the firm.
The directors are considering the partial replacement of equity with debt. With new borrowings debt amounts to a total of 60%. Director A believes that cost of equity remains constant at 15%. Director B, however, believes that shareholders demand a rate of return of 23,7%. Director C believes that shareholders demand a rate of 17% and director D expects that rate of return shifts to 28%. Assuming that cost of debt remains at 9%
b. Calculate WACC and the value of the firm under each of these assumptions.
Is there any trade-off between the financial performance and the sustainability of the company?
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