ABC corporation's CFO decided to reevaluate its capital structure. Currently, ABC's stock trades for $30 a...

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ABC corporation's CFO decided to reevaluate its capitalstructure. Currently, ABC's stock trades for $30 a sHARE, AND 1BILLION SHARES ARE OUTSTANDING. ABC's market value of debt is $10billion. we do not have any coupon or yield-to maturity informationfor ABC's debt. we also information on ABC's bond rating! However,ABC's beta is 1.2. ABC's income statement shows that its marginaltax rate is 35, its EBIT is 51.5 billion, and total interest paidcurrently is $300 million. At the moment risk- free rate is 3% andmarket risk premium is 5%. The CFO wants to compare ABC's currentcapital structure with the proposed 50-50 (Debt/equity) capitalstructure and select the better one. CFO assumes that the new debtwill have the same cost of Debt ABC currently has. Please assumethe role of CFO and show which capital structure should beselected?

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Answer At Current capital structure Cost of equity Risk free rate Beta Market risk premium 3 12 5 9 Cost of debt Interest Value of debt 300 10000 3 Debt value 10 billion Equity See Answer

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ABC corporation's CFO decided to reevaluate its capitalstructure. Currently, ABC's stock trades for $30 a sHARE, AND 1BILLION SHARES ARE OUTSTANDING. ABC's market value of debt is $10billion. we do not have any coupon or yield-to maturity informationfor ABC's debt. we also information on ABC's bond rating! However,ABC's beta is 1.2. ABC's income statement shows that its marginaltax rate is 35, its EBIT is 51.5 billion, and total interest paidcurrently is $300 million. At the moment risk- free rate is 3% andmarket risk premium is 5%. The CFO wants to compare ABC's currentcapital structure with the proposed 50-50 (Debt/equity) capitalstructure and select the better one. CFO assumes that the new debtwill have the same cost of Debt ABC currently has. Please assumethe role of CFO and show which capital structure should beselected?