Maurice Tutor

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    Argosy University/ Phoniex University/
    Nov-2005 - Oct-2011

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    Phoniex University
    Oct-2001 - Nov-2016

Category > Management Posted 31 May 2017 My Price 10.00

Craig company

Craig company has a market value of $100M, consisting of 1M shares selling for $50 per share and $50M of 10% perpetual bonds now selling at par.The company's EBIT is $13.4M and its tax rate is 15%. The company can change its capital structure either by increasing its debts to 70% (based on market values) or decreasing it to 30%. If it decisdes to increase its use of leverage, it must call its bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bomds and replace them with new 8% coupon bonds. The company will sell or purchase stock at the new equilibrium price to complete the the capital structure change. The fimr pays out all earnings as dividends; hence its stock is zero-growth stock. Its current cost of equity, r-s, is 14%. If it increases leverage, r-s will be 16%. If it decreases leverage, r-s will be 13%. What is the firm's WACC and total corporate value under each capital structure?

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Maurice Tutor
(5)
Status NEW Posted 31 May 2017 06:05 PM My Price 10.00

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