First Inc. currently has 25,000 shares outstanding, selling at $80 per share. Its 8% perpetual debts have a par value of $800,000 and are trading at 125. The EBIT is expected to be $540,000 forever. The company is considering a new issue of perpetual debts of $1,000,000 to buy back its stocks. The new debts will have the same yield as the existing debts. The tax rate is of 30%.
a. What is the debt equity ratio before the new debt issue?
b. What is the cost of equity before the new debt issue if First is all equity financed?
c. What is the WACC before the new debt issue?
d. What is the debt equity ratio after the new debt issue?
e. What is stock price after the new debt issue?
f. What is the WACC after the new debt issue?
g. Determine the breakeven EBIT between the existing and the proposed capital structures.