Assume that there are no taxes or transaction costs, and that the Modigliani-Miller propositions are true. Bluth Banana Corp (BBC). currently has 35 million shares outstanding (with a stock price of $18 per share) and no debt. The beta of the firm is 1.2.
BBC plans to issue $50 million (market value) in risk-free debt. It plans to use this $50 million to repurchase stock. The market risk premium is 4% and the risk free rate is 5%.
a.) Evaluate what is the value of the equity in BBC?
b.) Evaluate what is BBC's WACC before issuing the debt?
c.) Determine what will be value of BBC after issuing the debt?
d.) Find what will BBC's WACC be after issuing the debt?
e.) After this transaction, what will the beta of BBC's equity be?