Cheshire Corporation is now financed 100% with equity. The cost of equity is 15%. Cheshire is considering a proposal to borrow enough money at 7% to buy back half of its common stock. It would then be financed 50% with debt and 50% with equity
Assume that this does not affect the cost of equity. Cheshire's tax rate is 40%. What is Cheshire's cost of capital without and with the stock repurchase?
Answer: Cheshire's cost of capital is now 15%. After the stock repurchase, it would be
7%(1 - .4)(.5) + 15%(.5) = 9.6%
Business
You might also like to view...
Within the computer, a system clock generates pulses at a rapid rate, setting the pace for processing events to take place, rather like a metronome marks time for a musician
Indicate whether the statement is true or false
Business
According to U.S. Census data projections, by the year 2030, 70 percent of the growth in the United States will occur in:
A) the South and West. B) the South. C) the Pacific Northwest. D) the West. E) the Mid-West and Mid-Atlantic.
Business