MJA1415 1 answer below »

Problem 1 Lowell Inc. has no debt and its financial position is given by the following data: Assets (book = market) $3,000,000 EBIT $500,000 Cost of equity (Ks) 10% Stock price (P0) $15 Shares outstanding n0 200,000 Tax rate T 40% The firm is considering selling bonds and simultaneously repurchasing some of its stock. It if moves to capital structure with 30 percent debt based on market values, its cost of equity, Ks, will increase to 11 percent to reflect the increased risk. Bonds can be sold at a cost (Kd) of 7 percent. Lowell Inc. is a no-growth firm.