Inc. has zero growth and no debt. Its FCF is $30 million. Its cost of equity (and hence its WACC since it has no debt) is 9%. Inc is considering recapitalizing by issuing $100 million in debt and using it to repurchase stock. Inc's tax rate is 25%. According to Modigliani and Miller's model with taxes, how much will the combined value of Inc's debt and equity be after the recapitalization?
The value of the unlevered firm is
30(1 – .25)/.09
V = EBIT(1 – tC)/RU
V = $30(1 – .25)/.09
V = $250 mln
The value of the levered firm is:
V = Value of unlevered firm + tCD
V = $250+100*0.25
V = 275 mln
Inc. has zero growth and no debt. Its FCF is $30 million. Its cost of equity...