Ekson Energy, Inc. (EKS) is an energy company with a market debt-to-equity ratio of 3. Suppose...
Ekson Energy, Inc. (EKS) is an energy company with a market debt-to-equity ratio of 3. Suppose its current cost of debt capital is 6%, and its cost of equity capital is 14%.
(a) Calculate EKS’s weighted average cost of capital assuming no taxes and asymmetric information, i.e. Modigliani Miller propositions I and II with no taxes are in place.
Part 2:
Suppose now that if EKS issues equity and uses the proceeds to repay its debt and reduce its debt-toequity ratio to 2, it will lower its debt cost of capital to 5.5%.
(b) Calculate the new WACC assuming MM propositions with no taxes hold.
(c) Calculate EKS’s cost of equity capital after this reduction in leverage.
Part 3:
Assume now that EKS issues even more equity and pays off its debt completely.
(d) Calculate EKS’s cost of equity capital now. (Notice that in this situation EKS is unlevered!)
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