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47 48 Reacher Technology's EBIT was $40 million last year and is not expected to grow (g=0) and pays out 100% of 49 earnings as dividends annually. The firm is currently financed with all equity and it has 10 million shares 50 outstanding and is considering recaptizing its equity with debt where new debt would be issued and proceeds 51 used to buyback stock. Show the firm's market value of operations, MV of debt, MV of equity, shares 52 outstanding, and stock price for each level of debt the firm is considering. 53 54 EBIT= $ 40.00 FCF= 55 56 Debt/Value WACC MV MV of Debt MV of Equity #Shares Stock 57 Price 58 0% 10 59 10% 60 20% 61 30% 62 40% 63 50% 64 60% 65 70% 66 67 68 69 69 70 Complete Reacher's income statement for each debt level. Show net income, dividends per share, ROE, and 71 re-estimate stock price using the constant growth formula: D(1 + g) Po= 72 1's - 9 73 74 Income 75 Statement 0% 10% 20% 30% 50% 60% 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 EBIT INT EBT -TAX NI DPS ROE Po = 40% 70% 7 8 Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for 9 different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate 10 of Reacher's unlevered beta, and the tax rate are also shown below. Based on this information, what is the 11 firm's optimal capital structure and what is the weighted average cost of capital at the optimal structure? 12 13 14 Percent Input Data Risk-free rate Financed 4.5% 15 16 with Debt Before-tax Cost Debt 5.5% Market risk premium Unlevered beta 17 (wa) (rd) 0.8 18 0% 6.0% Tax rate 40.0% 19 10% 6.1% 20 20% 7.0% 21 30% 8.0% 22 40% 10.0% 23 50% 12.5% 24 60% 15.5% 25 70% 18.0% 26 27 Fill in formulas in the yellow cells to find the optimum capital structure. 28 29 Debt/Value Equity/Value Levered 30 Ratio (Wd) Ratio (WS) Debt/Equity Ratio (Wd/Ws) 0.00 A-T Cost of Debt (rd) 3.60% Beta 31 0% 100.0 0.80 32 10% 90.0 0.11 3.66% 0.85 33 20% 80.0 0.25 4.20% 0.92 34 30% 70.0 0.43 4.80% 1.01 35 40% 60.0 0.67 6.00% 1.12 36 50% 50.0 1.00 7.50% 1.28 37 60% 40.0 1.50 9.30% 1.52 38 70% 30.0 2.33 10.80% 1.92 39 40 41 WACC at optimum debt ratio = 42 Optimum debt ratio = 43 44 8.46% 30% Cost of Equity 8.90% 9.19% 9.56% 10.03% 10.66% 11.54% 12.86% 15.06% WACC 8.90% 8.64% 8.49% 8.46% 8.80% 9.52% 10.72% 12.08% 47 48 Reacher Technology's EBIT was $40 million last year and is not expected to grow (g=0) and pays out 100% of 49 earnings as dividends annually. The firm is currently financed with all equity and it has 10 million shares 50 outstanding and is considering recaptizing its equity with debt where new debt would be issued and proceeds 51 used to buyback stock. Show the firm's market value of operations, MV of debt, MV of equity, shares 52 outstanding, and stock price for each level of debt the firm is considering. 53 54 EBIT= $ 40.00 FCF= 55 56 Debt/Value WACC MV MV of Debt MV of Equity #Shares Stock 57 Price 58 0% 10 59 10% 60 20% 61 30% 62 40% 63 50% 64 60% 65 70% 66 67 68 69 69 70 Complete Reacher's income statement for each debt level. Show net income, dividends per share, ROE, and 71 re-estimate stock price using the constant growth formula: D(1 + g) Po= 72 1's - 9 73 74 Income 75 Statement 0% 10% 20% 30% 50% 60% 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 EBIT INT EBT -TAX NI DPS ROE Po = 40% 70% 7 8 Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for 9 different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate 10 of Reacher's unlevered beta, and the tax rate are also shown below. Based on this information, what is the 11 firm's optimal capital structure and what is the weighted average cost of capital at the optimal structure? 12 13 14 Percent Input Data Risk-free rate Financed 4.5% 15 16 with Debt Before-tax Cost Debt 5.5% Market risk premium Unlevered beta 17 (wa) (rd) 0.8 18 0% 6.0% Tax rate 40.0% 19 10% 6.1% 20 20% 7.0% 21 30% 8.0% 22 40% 10.0% 23 50% 12.5% 24 60% 15.5% 25 70% 18.0% 26 27 Fill in formulas in the yellow cells to find the optimum capital structure. 28 29 Debt/Value Equity/Value Levered 30 Ratio (Wd) Ratio (WS) Debt/Equity Ratio (Wd/Ws) 0.00 A-T Cost of Debt (rd) 3.60% Beta 31 0% 100.0 0.80 32 10% 90.0 0.11 3.66% 0.85 33 20% 80.0 0.25 4.20% 0.92 34 30% 70.0 0.43 4.80% 1.01 35 40% 60.0 0.67 6.00% 1.12 36 50% 50.0 1.00 7.50% 1.28 37 60% 40.0 1.50 9.30% 1.52 38 70% 30.0 2.33 10.80% 1.92 39 40 41 WACC at optimum debt ratio = 42 Optimum debt ratio = 43 44 8.46% 30% Cost of Equity 8.90% 9.19% 9.56% 10.03% 10.66% 11.54% 12.86% 15.06% WACC 8.90% 8.64% 8.49% 8.46% 8.80% 9.52% 10.72% 12.08%

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