Question 2 (25%)
EverGrowth Inc. is currently financed by all equity. It has entered the maturity stage of life cycle and is
expected to have EBIT of $420,000 per year forever. There are 20,000 shares outstanding that are
trading at $105 per share. The board of EverGrowth is considering recapitalizing to a debt-to-asset ratio
of 0.25. The borrowing cost will be 5%. The tax rate is 40%.
a) What is the current cost of equity?
b) Calculate the WACC after the recapitalization.
c) Using the WACC in part b), calculate the firm value.
d) Using FTE method, calculate the equity value after the recapitalization.
e) What is the PV of tax shield?