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Southern Mining's outstanding debt has a before-ta...

Description

Solution


Question

Southern Mining's outstanding debt has a before-tax cost of 8.5 percent and a current market value of $37.5 million. The market value of the firm's outstanding equity is $62.5 million. Given Southern's current financial/capital structure, the firm's cost of equity capital is 14.9 percent. Southern is planning to issue an additional $12.5 million of common stock in order to retire $12.5 million of outstanding debt. Assuming that Southern's debt is currently risk free and that the corporate tax rate is zero (as are all personal income tax rates), determine (a) the impact of the recapitalization on Southern's cost of equity capital, (b) the impact of the recapitalization on Southern's weighted average cost of capital

 

Paper#8821 | Written in 18-Jul-2015

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