Mason's Co currently has an EBIT of $65,000 and is a zero-growth company. It has $150,000 (book value) of perpetual debt outstanding carrying a coupon rate of 7% and a current market price of 101.2. Smith's current cost of equity is 9.3%, and its tax rate is 21%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. Please show all calculations.

a. What is Mason's current total market value and weighted average cost of capital?

b. The firm is considering moving to a capital structure that is comprised of 40% debt and 60% equity, based on market values. The new funds would be used to replace the old debt and to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on debt to rise to 8.2%, while the required rate of return on equity would rise to 9.7%. If this plan were carried out, what would be Smith's new WACC and total value?

c. Now assume that Mason's is considering changing from its original capital structure to a new capital structure that results in a stock price of $62 per share. The resulting capital structure would have a $336,000 total market value of equity and a $504,000 market value of debt. How many shares would Mason's repurchase in the recapitalization? (Round to the nearest whole share.)

d. Now assume that Mason's is considering changing from its original capital structure to a new capital structure with 60% debt and 40% equity. If it makes this change, its resulting market value would be $720,000. What would be its new stock price per share?

a. Mason's current total market value is $751,800 and its current weighted average cost of capital (WACC) is approximately 8.33%. b. The new WACC would be approximately 9.26% and the total value would remain $751,800. c. The number of shares repurchased would be 0. d. The new stock price per share would be $28.80.

a. To calculate Mason's current total market value, we need to find the market value of equity and the market value of debt.
Market value of equity = Number of shares * Price per share = 10,000 * $60.00 = $600,000
Market value of debt = Book value of debt * Market price = $150,000 * 101.2% = $151,800
Therefore, Mason's current total market value is $600,000 + $151,800 = $751,800.

Next, let's calculate the weighted average cost of capital (WACC). The formula for WACC is:
WACC = (Weight of Debt * Cost of Debt) + (Weight of Equity * Cost of Equity)
Given that the cost of equity is 9.3% and the cost of debt is 7%, and the weights are the proportions of debt and equity in the capital structure, we can calculate WACC as follows:

Weight of Debt = Market value of debt / Total market value = $151,800 / $751,800 = 0.202
Weight of Equity = Market value of equity / Total market value = $600,000 / $751,800 = 0.798
WACC = (0.202 * 7%) + (0.798 * 9.3%) = 8.33%
Therefore, Mason's current WACC is approximately 8.33%.

b. If Mason's moves to a capital structure of 40% debt and 60% equity, we need to calculate the new WACC and total value.
Given that the required rate of return on debt would rise to 8.2% and the required rate of return on equity would rise to 9.7%, we can calculate the new WACC as follows:
Weight of Debt = 0.4
Weight of Equity = 0.6
New WACC = (0.4 * 8.2%) + (0.6 * 9.7%) = 9.26%

To calculate the new total value, we need to find the market value of debt and equity under the new capital structure:
Market value of debt = Weight of Debt * Total value = 0.4 * Total value
Market value of equity = Weight of Equity * Total value = 0.6 * Total value
Since the new total value includes the repurchase of old debt and stock, it will be equal to the current total value:
Total value = Current total value = $751,800
Therefore, the new total value would also be $751,800.

c. If Mason's changes to a new capital structure resulting in a stock price of $62 per share, we can calculate the new market value of equity and the number of shares repurchased.

Market value of equity = Number of shares * Price per share = 10,000 * $62 = $620,000
The new market value of equity would be $620,000.
To find the new market value of debt, we can use the formula:
Market value of debt = Total market value of equity and debt - Market value of equity
Market value of debt = $336,000 + $504,000 - $620,000 = $220,000

To calculate the number of shares repurchased, we need to find the difference between the current market value of equity and the new market value of equity:
Number of shares repurchased = (Market value of equity before recapitalization - Market value of equity after recapitalization) / Price per share
Number of shares repurchased = ($600,000 - $620,000) / $62 = -322.58
Since we cannot repurchase a negative number of shares, the number of shares repurchased would be 0.

d. If Mason's changes to a new capital structure with 60% debt and 40% equity resulting in a total market value of $720,000, we can calculate the new stock price per share.
Market value of equity = Weight of Equity * Total market value = 0.4 * $720,000 = $288,000
Number of shares = Market value of equity / Price per share = $288,000 / Price per share
Given that the number of shares is 10,000, we can set up the equation:

$288,000 / Price per share = 10,000
Price per share = $288,000 / 10,000 = $28.80
Therefore, the new stock price per share would be $28.80.

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