Business, 25.11.2021 05:10 only1cache

Mercer Corp. has 10 million shares outstanding and $96 million worth of debt outstanding. Its current share price is $80. Mercer's equity cost of capital is 8.5%. Mercer has just announced that it will issue $346 million worth of debt. It will use the proceeds from this debt to pay off its existingâ€‹ debt, and use the remaining $250 million to pay an immediate dividend. Assume perfect capital markets. a. Estimateâ€‹ Mercer's share price just after the recapitalization isâ€‹ announced, but before the transaction occurs.
â€‹Mercer's share price just after the recapitalization isâ€‹announced, but before the transaction occurs is $80. (Round to the nearestâ€‹ dollar.)
b. Estimateâ€‹ Mercer's share price at the conclusion of the transaction. (Hintâ€‹: Use the market value balanceâ€‹ sheet.)â€‹
Mercer's share price at the conclusion of the transaction is $55. (Round to the nearestâ€‹ cent.)
c. Supposeâ€‹ Mercer's existing debt was risk free with a 4.38% expectedâ€‹ return, and its new debt is risky with a 5.01% expected return. Estimateâ€‹ Mercer's equity cost of capital after the transaction.
â€‹Mercer's equity cost of capital after the transaction is â€‹%. (Round to two decimalâ€‹ places.)

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