Capital Structure and Leverage 19

Capital Structure and Leverage 19 - increase in value(from...

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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 before-tax 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 risk-free 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 before-tax 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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