The Jackson Court Company (JC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6%. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero growth company. JC's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares.
a) What is JC's current total market value and weighted average cost of capital?
b) What is its current stock price?
c) The firm is considering recalling the 6% debt and issuing $400000 of new debt. The new funds would be used to replace the old debt and to repurchase stock. It is estimated that the increase in riskiness resulting from the leverage increase would cause the required rate of return on debt to rise to 7%, while the required rate of retur on equity would increase to 11%. if this plan were to be carried out what would be JCs new stock price and WACC
d) Assuming JC can increase debt to 400000 wihtot refunding the 200000 of 6% debt. Further assuming that required returns on all debt is 7% and that required rate of return on equity would again increase to 11%. Under these new assumptions, what would the companys new stock price and WACC be?