The Nantucket Nugget is unlevered and is valued at $640,000. Nantucket is currently deciding whether...
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The Nantucket Nugget is unlevered and is valued at $640,000. Nantucket is currently deciding whether including debt in their capital structure would increase their value. Under consideration is issuing $300,000 in new debt with an 8% interest rate. Nantucket would repurchase $300,000 of stock with the proceeds of the debt issue. There are currently 32,000 shares outstanding.
- If the firms effective marginal tax bracket is zero, what is the change in value and how many shares of stock will be repurchased?
- If the firms current cost of equity (unlevered) is 12%, and the effective marginal tax bracket is zero, what will Nantucket's new WACC be?
- If the firms current of cost of equity (unlevered) is 12%, and its effective marginal tax bracket is 34%, what will Nantucket's new WACC be?
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