Question - Shearer Sales Consulting (SSC) has 20 million shares of stock outstanding that trade at $50. The risk-free interest rate is 4% and the market risk premium is 7.6%. This stock has a beta of 2.16. SCC also has $350 million in 11% bonds outstanding and the company has a 34% tax rate. Show all calculations for each of your answers to earn full credit.
Part 1: a) Calculate the firm's market capitalization, and then calculate the enterprise value.
b) Use the CAPM formula to determine the firm's cost of equity, and
c) Utilize this information to calculate SCC's weighted average cost of capital.
Part 2: a) Assume that SCC issues $100 million in bonds to buy back $100 million in common stock in order to recapitalize the firm. What is Shearer Consulting's new WACC?
b) Finally, discuss why there is a change in WACC and explain the impact of the components of capital structure on a company's cost of capital.