Solution :

Considering WACC for evaluating the restructuring options.

Tax = 32.50%, constant for any capital structure.

D/E ratio : Based on the company decision to go for long term options.
Interest rate for debt is given = LIBOR+0.8% = 6.16%.

UnLevered Beta : 0.85 is given.

Beta Levered for diff capital structure : Beta unlevered*(1+(1-Tax)*(D/E))

For Expected return calculation we have considered the equity market risk
premium to be at 10% from exhibit 6.
Risk free is taken from exhibit : return from 3yr US bonds

So Expected return Cost to equity (r e ) = Risk Free + B*(EMRP)

EMRP = Risk market Risk free

WACC = rd(D/V)(1-T) + re(E/ V)

CPK Capital Restructing Options

D/C 0 10% 20% 30%

Interest Rate 6.16% 6.16% 6.16% 6.16%
32.50 32.50 32.50
Tax rate % % % 32.50%

EBIT 30054 30054 30054 30054

Interest Rate 0 1391 2783 4174
EBT 30054 28663 27271 25880
Tax 9768 9315 8863 8411
Net Income 20286 19347 18408 17469

ROE Book Value

Debt 0 22589 45178 67766
22588 20329 18071
Equity 8 9 0 158122
22588 22588 22588
Total Capital 8 8 8 225888

10.19
ROE (Book Value) 8.98% 9.52% % 11.05%
 ROE Market Value
Debt 0 22589 45178 67766
64377 62851 61325
Equity 3 6 9 598003
64377 65110 65843
Total Capital 3 5 7 665769

ROE (Market Value) 3.15% 3.08% 3.00% 2.92%

Going by Equity
No of Shares 29100 28079 27058 26037
No of Shares repurchased 0 1021 2042 3063
Share Price 22.12 22.38 22.66 22.97
EPS 0.70 0.69 0.68 0.67

WACC calculation
Beta 0.85 0.87 0.89 0.92
Interest (Debt, LIBOR+0.8%) 6.16% 6.16% 6.16% 6.16%
Kd (Cost to debt) 4.16% 4.16% 4.16% 4.16%
Rf (Risk Free, treasury bond return) 5% 5% 5% 5%
10.00 10.00 10.00
Rm (Risk Premium) % % % 10.00%
Ke (Cost to Equity) 9.25% 9.35% 9.46% 9.58%

D/E (ratio) 0.000 0.036 0.074 0.113

D/C (ratio) 0.000 0.035 0.069 0.102
E/C (ratio) 1.000 0.965 0.931 0.898

WACC 9.25% 9.17% 9.10% 9.02%

Note 1. : From Exhibit 6 : CPK shares trades 10% more than the S&P small cap.
Note 2. : From exhibit 6, Risk market is coming 10.

Capital Structure
(D/C) 0 10% 20% 30%
WACC 9.25% 9.17% 9.10% 9.02%

Solution to go ahead with: For D/C = 30%, WACC = 9.02% which is minimum, so M/S
CPK should go ahead with the recapitalization. This option will maximize the firm
value.