Zeta, Inc. is an all equity firm. The firm’s equity is worth $600 million. The c
ID: 2745550 • Letter: Z
Question
Zeta, Inc. is an all equity firm. The firm’s equity is worth $600 million. The cost of equity is 12.2%. Zeta plans to issue $400 million in debt and use the proceeds to repurchase stock. The cost of debt is 8%. (Assume an MM World without taxes.)
a) What is the $ value of Zeta after the debt is added? This question can be answered without any calculations – Why?
b) What is the weighted average cost of capital for Zeta after the debt is added? What is the cost of equity for Zeta? Show calculations for the cost of equity.
Explanation / Answer
Value of ZETA = Value of debt + Value of equity
= 600 million
Weighted average cost of capital = (600-400)/600*12.2%+400/600*8%
= 200/600*12.2%+400/600*8%
= 4.067%+5.33% i.e 9.40%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.