Omega Corp. currently has 200,000 shares of stock outstanding and no debt. However, they are planning on issuing debt in order to buy back stock. Their EBIT is a constant $500,000 regardless of how much debt they issue and they pay all net income out as dividends. Their tax rate is 40%. They have estimated the following costs of debt and costs of equity for various levels of debt.
Debt Rd Re Net Inc Equity Value Firm Value %Debt WACC Price
0 6.00% 9.00% 300,000 3,333,333 3,333,333 0.00% 9.00% 16.67
500,000 6.30% 9.40% 2,990,426 3,490,426 14.32%
1,000,000 6.80% 10.00% XXXX
1,500,000 7.50% 11.00% 41.51% 18.07
2,000,000 8.50% 12.50% 3,584,000 8.37% XXXX
2,500,000 10.00% 14.50% 150,000 XXXX
3,000,000 12.00% 17.00% 84,000 85.86% XXXX 17.47
What will their Net Income be if they issue $1,000,000 in debt? a. $198,000 b. $216,000 c. $259,200 d. $330,000
What will their WACC be if they issue $3,000,000 in debt? a. 8.23% b. 8.30% c. 8.42% d. 8.58%
What will their Share Price be if they issue $2,000,000 in debt? a. $16.94 b. $17.12 c. $17.45 d. $17.92
What is the total value of the firm if they issue $2,500,000 worth of debt? a. 2,846,000 b. 3,183,000 c. 3,535,000 d. 3,872,000