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The Fast Tracker Company is unlevered and currently valued in the market at $640,000 but the firm is considering leveraging its capital structure with bank debt. In particular,the firm is considering raising enough debt with 8% interest rateto repurchase $300,000 of common stocks. Historically, the firm'smarket beta has been 0.8, their national market is expected to return 14% in the long-run, and the long-run risk-free rate is 4%. There are currently 32,000 shares outstanding and the marginal tax rate is zero.
What is the cost of equity for Fast Tracker before and after the debt issue?
Assume now that the whole change in capital structure will cost Fast Tracker $25,000 in floatation costs. What is the value of the firm after the change in the capital structure?
How will your answer change to the previous question if the marginal tax rate is 34% for Fast Tracker?
What is the minimum marginal tax rate for Fast Tracker to be willing to issue the debt?
This question was answered on: Jan 30, 2021
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Jan 30, 2021EXPERT
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