Company JJT Inc. has 40:60 debt-equity structure. It is paying 12% nominal interest rate on its loan. Its shares are currently traded for £24 and the last dividend has been £1.5. Dividend growth rate is currently 4 per cent. The last profit after tax was £ 200 000 and the tax rate was 40 per cent. The corporation is not issuing any new equity.
a) Calculate the cost of debt and cost of equity of JJT, Inc.
b) Calculate the WACC of JJT at its current capital structure 40:60 and calculate the value of a firm.
c) Assume now that the company decides to increase its leverage to 45:55. The bank now requires JTT to pay 15 per cent nominal interest rate for the loans. At the same time the share price decreases to £ 20. Other things remain constant. Calculate the new cost of debt and cost of equity of JJT Inc.
d) Calculate the WACC of JJT and the value of firm under this levered capital structure. Compare your results.