Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. accounting
  3. baxter has historically maintained a debt-equity r

Baxter has historically maintained a debt-equity ratio of approximately 0.25. The firm enjoys very stable...

80.2K

Verified Solution

Question

Accounting

  1. Baxter has historically maintained a debt-equity ratio of approximately 0.25. The firm enjoys very stable demand for its products, and consequently can borrow at 4.20%, just 20 basis points over the risk-free rate of 4%. Baxters tax rate is 40%. Current market value of Baxter (including debt and equity) is 120 m. The company is expected to have free cash flows of $10 billion in perpetuity

Baxter believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.50, it believes its borrowing costs will rise only slightly to 4.50%.

  1. Determine Baxters rWACC before the recapitalization and rA
  2. If Baxter announces that it will raise its debt-equity ratio to 0.5 through a leveraged recapitalization, determine its new WACC
  3. Determine the increase in the company value that would result from the anticipated tax savings.

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students