1. Baber Corporation has chosen to purchase the additional equipment. If Baber funds the project entirely with debt, what is the firm's weighted average cost of capital? Explain your answer.
A Comparison of the APV, FTE, and WACC Approaches
2. ABC, Inc., is an unlevered firm with expected perpetual annual before-tax cash flows of $30 million and required return on equity of 18 percent. It has 1 million shares outstanding. ABC is paying tax at a marginal rate of 34 percent. The firm is planning a recapitalization under which it will issue $50 million of perpetual debt bearing a 10- percent interest rate and use the proceeds to buy back shares. Calculate the post-recap share price, earnings per share, and required return on equity.