BUS1007 / SMB3207Week 10 Financing decision and analysis of leverage
Workshop Questions
BDJ Ltd currently has no debt and 60,000 shares outstanding priced at $5 per share. BDJ has decided in favour of a capital restructuring that involves raising $150,000 in debt at 10% interest. The firm will use the debt to buy back shares. Ignoring taxes, calculate the break-even EBITthat BDJ’s management must be expecting.
WBL Ltd has no debt and expects an EBIT of $9,000 every year forever. The firm’sshareholders require 15% return and relevant tax rate is 30%.
What is the current value of the firm?
If WBL Ltd borrows $30,000 at 7% and uses the proceeds to buy back shares, what will be the new value of WBL Ltd? What would be the value of equity of the levered firm?
The Sail Boat Company has a RAof 16%. Its cost of debt is 13%. If Hobart Boat's debt-to-equity ratio is 2, and the relevant tax rate is 30%, what is its cost of equity?
Explain the optimal capital structure of a firm. Discuss how taxes and financial distress influences the optimal capital structure of a firm.
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