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Creative Solutions Inc has 15 million shares outstanding, trading at a price of $16 per share, and $260 million in debt. Creative’s equity cost of capital is 22% and its debt cost of capital is

  1. Creative Solutions Inc has 15 million shares outstanding, trading at a price of $16 per share, and $260 million in debt. Creative’s equity cost of capital is 22% and its debt cost of capital is 10%. The company decides to issue equity and use the proceeds to pay back its entire debt. Assume that there are no taxes or costs of financial distress.

    1. (5 points) What is the firm’s market capitalization after the change in capital structure?

    2. (5 points) What is the share price after the change in capital structure?

    3. (5 points) What is the equity cost of capital after the change in capital structure?

Apr 12 2021 View more View Less

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