Finance Paper - Greenwich Corporation

You have been hired as a management consultant by Greenwich Corporation to evaluate whether it has an appropriate amount of debt (the company is worried about a leveraged buyout).  You have collected the following information on Greenwich current position.

There are 200,000 shares outstanding at $15/share.  The stock has a beta of 1.15. The company has $300,000 in long-term debt outstanding and its currently rated ‘BBB.’  The current market interest rate is 7.5% on BBB bonds and 3.75% on T. Bills. 

The company’s marginal tax rate is 18%

You proceed to collect the data on what increasing debt will do to the company’s ratings:

Additional Debt*                              New Rating                         Interest Rate

$200,000                                              BB                                                           8.5%

$400,000                                              B                                                             9.5%

$600,000                                              B                                                             11.0%

$800,000                                              C                                                             12.5%

*In addition to the existing debt of $300,000

a. How much additional debt should the company take on?

b. What will the price per share be after the company’ takes on new debt?

c. What is the weighted average cost of capital before and after the additional debt?