ACTSC_372_Assignment_Two_Spring_2010 - ACTSC 372 Corporate...

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ACTSC 372— Corporate Finance 2 Assignment 2 – Due Date Wednesday June 30 th at 10:00 am in the drop boxes Question 1: A Company has a target capital structure of 55 percent common stock and 45 percent debt. If the cost of equity is 16% and the cost of debt is 9%, what is the company’s WACC. They have a corporate tax rate of 35%. Question 2: If debt is cheaper than equity, why is the minimum WACC attainable for a company not kd(1-Tc)? Question 3: In a world with no taxes, no transaction costs and no costs of financial distress, is the following statement true, false or uncertain? If a firm issues equity to repurchase debt, the price per share of the firm’s stock will rise because the shares are less risky? Explain. Question 4: ABC currently has no debt, 100,000 shares outstanding trading at $50 per share and the beta of its stock is 1.2. Assume the risk free rate is 5% and the market risk premium is 5%. ABC is thinking of changing its capital structure to a 50% debt-to-equity ratio. Assume the debt
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This note was uploaded on 05/31/2011 for the course ACTSCI 372 taught by Professor Wood during the Spring '09 term at Waterloo.

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