Question
Plastico, a producer of consumer plastic products is evaluating its capital arrangement. The book cost balance sheet of the company follows- (all numbers in millions)
Assets Liabilities
Current Assets $1000 Debt $2500
Net Fixed Assets $4000 Equity $2500
Total $5000 $5000
In addition, you are provided the following information
•The company's debt is long-term bonds, the voucher rate is 10 percent . Bonds are at present rated AA with a defer to Maturity of 12%. The bond's market value is 80 percent of par
•The firm presently has 50 million shares outstanding; the present market price per share is $80. The firm pays a dividend of $4 per share, and has a P/E ratio of 10
• The stock currently has a β of 1.2. The T-Bond rate is 8%
• The firm's tax rate is .40 Plastico is considering a major change in its capital organization. The firm plans to issue $3 billion in new debt and buy back stock. This will cause the firm's debt rating to drop to CCC. (CCC debt yields 18% in the market)
a) Find the cost of equity after this change takes place
b) Find the firm's WACC
c) Assuming there is no cost of financial suffering imposed on the fixed, Describe new share price?
d) Examine how the cost of financial distress might influence this firm