Old Exam Questions  Capital Structure and Leverage
Page 19 of 31 Pages
increase in value (from the increased leverage), and the firm will be able to repurchase
the stock at its current price. Given this information, determine what the new dividend
per share will be once a true equilibrium is eventually established.
A.
$5.90
B.
$5.16
C.
$6.64
D.
$6.27
E.
$5.53
31.
Assume that a firm’s current capital structure consists of 40 percent debt and 60
percent stock, that the beforetax cost of debt is 5.0%, that the tax rate is 40 percent,
that the stock has a levered beta of 1.20, that the riskfree rate is 3.0%, and that the
return on the market is 13.0%. As you can calculate, the WACC for this firm is
currently 10.2%.
Assume now that the firm wishes to change its capital structure to 60 percent debt and
40 percent stock, and that they believe that this increase in leverage will increase the
beforetax cost of the debt to 6.0%. Using the Hamada equations to unlever and
relever beta (take out to at least 4 decimal places), determine what the firm’s WACC
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 Spring '08
 Staff
 Cost Of Capital, Debt, Leverage, perc ent debt

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