Capital structure theorycompany x has an all common equity

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Capital Structure Theory

Company X has an all common equity capital structure. Pertinent financial characteristics are:

Shares of common stock outstanding 1,000,000
Common stock price P0 = $22 per share
Expected level of EBIT = $4,750,000
Dividend payout ratio = 100 percent

Question 1: Under the present capital structure, what is the total value of the firm?
Question 2: What is the cost of common equity capital, Kc? What is the composite cost of capital K0 ?
Question 3: If company X sells $1 million in long term debt with an interest rate of 9%. And the proceeds are used to retire outstanding common stock. According to NOI theory (independence hypothesis), what will the firm's cost of equity after the structural charge?
What will the dividend per share flowing to the firm's common shareholders?
By what percentage has the dividend per share changed owing to the capital structure change?
By what percentage has the cost if common equity changed owing to the capital structure change?
What will the composite cost of capital after the capital structure change be?

Help with is the formula and run down of the process to figure out this problem, the explicit answer is not necessary

 

Reference no: EM13364443

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