. What will the WACC be after recapitalization?

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1.13K viewsOctober 22, 2016

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Darshita 6.14K October 22, 2016 0 Comments

Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow

at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 31 percent. Bruce will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?

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score 0 · Answer 1 · 2016-10-22T11:00:59+00:00

VU

= $100,000(1 – 0.31)/0.18

= $383,333.33
VL

= $383,333.33 + 0.31($61,000)

= $402,243.33
RE

= 0.18 + (0.18 – 0.11)($61,000/$402,243.33 – $61,000)(1 – 0.31)

= 0.1886
WACC

= 0.1886($402,243.33 – $61,000)/$402,243.33 + 0.11($61,000/$402,243.33) (1 – 0.31)

= 17.15 %

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