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Question
Triad Labs has total assets of $120 million and $40 million of debt in its capital structure. Its current cost of equity is 13% and its cost of debt is 8.5%. Triad is considering increasing its debt to $70 million and purchasing its own stock with proceeds from the sale of $30 million in debt with a cost of 9.5%, reducing equity to $50 million. The cost of equity will increase to 14.5%. Net operating income (EBIT) will remain at $12 million. If Triad has a marginal tax rate of 40%, should the firm increase its debt? Assume that both debt and EBIT are perpetual.a. No, the value of the firm decreases $15.9 million
b. No, the value of the firm decreases $30.0 million
c. Yes, the value of the firm increases $14.1 million
d. Yes, the value of the firm increases $30.0 million
Answer
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