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What is the wacc for the firm with its new capital structure

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Eddie’s Electronics Limited has an EBIT of $450,000 that it expects it will earn forever, and it pays all of it’s earnings as dividends to shareholders (ie., no growth). The firm has a corporate tax rate of 40% and has an un-levered beta of .90. The firm has 92,656 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 4% and the S&P/TSX Composite Index is expected to yield 10%. Assuming a world of taxes and a cost for the risk of default,

a) Calculate the value of the firm?

b) Calculate the WACC for the firm?

c) What is the value of a share in the company and what is the EPS?

d) What is the value of the firm if the firm issues $600,000 of bonds at a coupon rate of 7.5%? The beta for the equity of the leveraged firm is 1.02?

e) What is the WACC for the firm with its new capital structure?

f) What is the value of the firm if the firm issues $1,000,000 of bonds at a coupon rate of 9%? The beta for the equity of the leveraged firm is 1.50?

g) What is the WACC for the firm with its new capital structure?

h) What can you conclude from your results?

Reference no: EM131581438

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