The Chief Financial Officer (CFO) of the Q14.05T Company is interested to identify the cost of capital and value of the company. Currently, theQ14.05T is an all-equity company. Earnings before interest and taxes (EBIT) for the company is expected to be $86,198 forever, and the cost of capital is currently 14.05 percent. The corporate tax rate applicable to this company is 32.0 percent.
Requirement-A. Calculate the market value of Q14.05T.
Requirement-B. Suppose Q14.05T floats a $34,579 debt issue and uses the proceeds to reduce share capital. The interest rate is 10.74 percent. Calculate the new value of the business.
Requirement-C. Calculate the new value of equity.
Requirement-D. Calculate the cost of equity of Q14.05T after the debt issue.
Requirement-E. Calculate the weighted average cost of capital.
Requirement-F. What are the implications for capital structure?
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