FINANCE-Capital Structure In-Class Problem Firm C currently has 320,000 shares outstanding

Capital StructureIn-Class ProblemFirm C currently has 320,000 shares outstanding with current market value of $33 per share andgenerates an annual EBIT of $1,500,000. Firm C also has $1 million of debt outstanding. Thecurrent cost of equity is 9 percent and the current cost of debt is 6 percent. The firm isconsidering issuing another $3 million of debt and using the proceeds of the debt issue torepurchase shares (a pure capital structure change). It is estimated that the cost of the new debtwill be 7 percent and that the cost of equity will rise to 10 percent with the additional debt. Themarginal tax rate is 34 percent.a. What is the current market value of the firm?b. What will the firm’s market value be after the announcement of the new debt issue? (Note thattotal market value of debt will be D0 + D1 and the interest costs that must be subtracted fromEBIT when calculating the market value of equity must be calculated in two parts and thenadded: Kd0D0 + Kd1D1).c. What will the estimated new share price be after the capital structure change announcement?d. How many shares are outstanding after the repurchase?Check answers: V0 = $11,560,000; V1 = $12,118,000; P1 = $34.74; n1 = 233,644

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