The debt has an interest rate of 4.00% (short term) and 6.00% (long term). The expected rate of return on the company’s shares is 13.00%. There are 7.54 million shares outstanding, and the shares are trading at €54. The tax rate is 25%. Assume the company issues €50 million in new equity and uses the proceeds to retire long-term debt. Also assume the company’s borrowing rates are unchanged and the short-term debt is permanent. Use the three-step procedure.
a. Calculate the cost of equity after the capital restructuring.
b. Calculate the WACC after the capital restructuring.
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