Question - Mercer Corp. has 10 million shares outstanding and $56 million worth of debt outstanding. Its current share price is $64. Mercer's equity cost of capital is 8.5%. Mercer has just announced that it will issue $381 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $325 million to pay an immediate dividend. Assume perfect capital markets.
A. Estimate Mercer's share price just after the recapitalization is announced, but before the transactions occurs. Mercer's share price just after the recapitalization is announced, but before the transaction occurs is $___. (I calculated $64 - please confirm if this is right.
B. Estimate Mercer's share price at the conclusion of the transaction (Hint: Use the market value balance sheet.) Mercer's share price at the conclusion of the transaction is $___. (I calculated $31.50).
C. Suppose Mercer's existing debt was risk free with a 4.65% expected return, and its new debt is risky with a 5.12% expected return. Estimate Mercer's equity cost of capital after the transaction. Mercer's equity cost of capital after the transaction is ___% (round two decimal places).