You are evaluating a recapitalization for a mature business with stable free cash flow. The CFO wants to know whether issuing additional debt to repurchase equity will lower the company's WACC and increase valuation, or whether the higher required return from lenders and shareholders offsets the tax shield. Assume a constant-growth valuation framework and that the tax rate remains unchanged after the transaction.
| Metric | Current | Proposed Recap |
|---|---|---|
| Debt as % of total capital | 20% | 40% |
| Cost of debt (pre-tax) | 5.0% | 6.5% |
| Cost of equity | 11.0% | 13.0% |
| Marginal tax rate | 25.0% | 25.0% |
| Next-year free cash flow to firm | $120,000,000 | $120,000,000 |
| Long-term FCF growth rate | 3.0% | 3.0% |
How would you calculate the change in WACC and enterprise value under the proposed recap, and would you recommend increasing leverage based on these numbers?