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Problem:

Question 1: Tweetco, a social media company, is unlevered with a market value of $1,000,000. Its book value of equity is $20,000. Tweetco is currently deciding whether including debt in its capital structure would increase its value. Its current cost of equity is 10%. Under consideration is issuing $200,000 in new bonds with a 5% annual interest rate. Tweetco would repurchase $200,000 of stock with the proceeds of the bond issue. Tweetco's effective marginal tax bracket is zero. What will Tweetco's new firm value be if it decides to issue the bonds?

Question 2: In question 1, what is the new cost of equity of Tweetco under the proposed capital structure change?

Question 3: In question 1, what is the new WACC of Tweetco under the proposed capital structure change?

Note: Provide support for rationale.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91163270

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