Q12 Granite Works Currently Maintains A Debt Equity Ratio Of 0 5 And Has A Tax Rate Of 40 Percent It Has 300 Perpetual 1 (93.33 KiB) Viewed 24 times
Q12 Granite Works currently maintains a debt-equity ratio of 0.5 and has a tax rate of 40 percent. It has 300 perpetual bonds each with $1,000 face value and 8% annual coupon rate. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $20 a share. The current market risk premium is 8 percent and the current risk-free rate is 3.4 percent. The firm is considering increasing its debt-equity ratio by issuing another 300 perpetual bonds at the same YTM. The proceeds from bond issuance will be used to buy back stock. (Hint: a perpetual bond keeps making coupon payment
forever and never pays back the face value.) (a) What is the current cost of equity and before-tax cost of debt? (b) What is the current firm value? What will be the firm value after the additional bond issuance and stock buyback?
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