Global Works Inc.(GWI) is an all equity firm, currently worth $ 100 million. Cost of equity capital is 20%. The CFO has pitched an exciting idea to the board.
She astutely points out that GWI can borrow at a much lower rate than its cost of equity capital.
This is correct. In abundance of caution, the board has asked you to evaluate the wisdom of the idea, specifically borrow $ 20 mil and use the proceeds to buy back some of the stock in order to lower the cost of capital.
For now, use WACC as a metric for decision. Assume the tax rate is zero. Show the board the following:
5a) Rwacc after buyback _______
5b) Value of remaining equity after buyback_______