題組內容

3. Mark Corp. is an all equity firm with 10 million shares outstanding and $100 million worth of debt outstanding. Its current share price is $75. Mark’s equity cost of capital is 8.5%. Mark has just announced that it will issue $350 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $250 million to pay an immediate dividend. Assume perfect capital markets.

(c) Suppose Mark’s existing debt was risk-free with a 4.25% expected return, and its new debt is risky with a 5% expected return. Estimate Mark’s equity cost of capital after the transaction. (6%)