Recapitalization of the Firm

Description

“Fixer Upper”, the smash hit show on HGTV, has just ended, and Chip and Joanna Gaines have taken their company Magnolia public. They have asked you, the CFO, to examine a possible recapitalization of the firm.    The firm’s current information is: 90% equity; cost of equity = 16% 10% debt; cost of debt = 7% Tax rate = 30% 8,000,000 shares outstanding No short-term investments FCF this year was $30,000,000 FCF is growing at 5% annually   The proposed change would result in the following: 60% equity; cost of equity = 17% 40% debt; cost of debt = 8% Use proceeds from the new debt to repurchase shares   For each of the following, tell Chip and Jo 1) the old values under the current capital structure and 2) the new values under the proposed capital structure: 1.     Cost of Capital 2.     Firm Value 3.     Share Price 4.     Shares Outstanding