AAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 30 million shares of stock outstanding, currently worth $55 per share. BBB Corporation uses leverage in its capital structure. The market value of BBB’s debt is $400mil., and its cost of debt is 4.5 percent. Each firm is expected to have earnings before interest and tax of $165mil. in perpetuity. Assume that every investor can borrow at 4.5 percent per year. Corporate tax rate is 40%. Q14. How much will it cost to purchase 20% of BBB's equity?

AAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 30 million shares of stock outstanding, currently worth $55 per share. BBB Corporation uses leverage in its capital structure. The market value of BBB’s debt is $400mil., and its cost of debt is 4.5 percent. Each firm is expected to have earnings before interest and tax of $165mil. in perpetuity. Assume that every investor can borrow at 4.5 percent per year. Corporate tax rate is 40%. Q14. How much will it cost to purchase 20% of BBB's equity?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter9: The Cost Of Capital

Section: Chapter Questions

Problem 7P

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