XOM Stock – XOM Is Considering A Change In Its Capital Structu…
XOM is considering a change in its capital structure. XOM will
increase its debt level to a capital structure with 50% debt and
repurchase shares with the extra money that it borrows. XOM will
retire old debt to issue new debt, and the rate on the new debt
will be 11%. XOM currently has $40M in debt carrying a rate of 9%,
and its stock price is $30 per share with 4 million shares
outstanding. XOM is a zero-growth firm and pays all its earnings as
dividends. The firm’s EBIT is $40 million, and its tax rate is 35%.
The market return is 13% and risk-free rate is 4%. XOM has a beta
a) What is the XOM’s unlevered beta? In all beta levering and
un-levering steps apply Hamada Equation.
b) What are XOM’s new beta and cost of equity if it has 50%
c) What are XOM’s WACC and total firm value with 50% of
d) What is the premium for financial risk attached to Nevada
Inc.’s equity, given its leverage ratio is 50%? You can
use your results from parts (a) and (b) to answer part (d).