olunteer Fabricators, Inc. (VF) currently has zero debt. It is a zero

QUESTION

olunteer Fabricators, Inc. (VF) currently has zero debt. It is a zero
growth company, and it has the data shown below. Now the company is
considering using some debt, moving to the market value capital
structure indicated below. The money raised would be used to repurchase
stock. It is estimated that the increase in risk resulting from the
additional leverage would cause the required rate of return on equity to
rise somewhat, as indicated below.EBIT =$80,000New Debt/Value =20%Growth =0%New Equity/Value =80%Orig cost of equity, rs =10.0%No. of shares =10,000New cost of equity = rs =11.0%Price per share =$48.00Tax rate =40%Interest rate = rd =7.0% Refer to Multi-Part 15-2. If this plan were carried out, what would be VFs new WACC and its new value of operations? WACC Value
Solution: VF Inc. Calculation of WACC WACC = Weight of debt * Cost of debt * (1-tax rate) + Weight of equity * Cost of equity =

(1-40%) + 80%*11% = 9.64% New value of operations = EBIT/WACC = $80,000/9.64% = $829,875.5

ANSWER:

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