UNLEV is an all-equity firm. It currently has an expected perpetual EBIT of $4,000 per year. The current cost of capital is 15% and there are 20,000 shares of UNLEV stock outstanding. The firm is considering issuing $8,800 in new par bonds to add financial leverage to the firm. The proceeds of the debt issue will be used to repurchase equity. The cost of debt is 10% and the tax rate is 34%. Assume that there are no transaction costs and flotation costs.
a) Assume a stockholder owns 1,000 shares of UNLEV before the restructuring. The stockholder prefers a debt/equity ratio = 1.0. Ignoring the taxes, how could the stockholder use homemade leverage to achieve the restructuring without the help of UNLEV?
b) If there were no taxes, what would be the value of UNLEV before the restructuring? Including the effect of taxes, what is the value of UNLEV before the restructuring?
c) Considering the taxes, what is the value of UNLEV after the restructuring? What is the present value of interest tax shield brought by the use of debt?
d) What is the value of UNLEV's equity after the restructuring?
e) What is UNLEV's cost of equity after the restructuring?
Show your calculations.