Assume that a firm has no debt in its capital structure. It has expected NOI of sh.100,000 and equity capitalization rate Ke of 10%. Since it is all equity financed, WACC = cost of equity(Ke) i.e 10%
Required:
1. Determine the value of the firm
2. Assume the firm in question 1 is able to change its capital structure replacing equity by debt of sh.300,000. The cost of debt is 5% Determine i. The value of the firm ii. The WACC.
3. Suppose the firm uses more debt in place of equity and increases debt to sh.900,000. Cost of debt is 5%. Ke= 10% and NOI is sh.100,000 Determine the value of the firm and the firm’s WACC.