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Homework answers / question archive / Solar Panel Ltd
Solar Panel Ltd. is a manufacturer of solar panels that is considering moving from its existing policy of not borrowing any money. The firm has 5 million shares outstanding, trading at $ 25 a share, no cash holdings and a beta of 1.25. The risk free-rate is 3%, the equity risk premium is 6% and the corporate tax rate is 40%.
a. Estimate the current cost of capital for the firm.
b. Assume that the firm can borrow $ 25 million at a pre-tax rate of 4% and buy back shares. Assuming that the firm is growing 3% a year in perpetuity and that investors are rational, try to estimate the change in value per share after the buyback.
