Logo
Home Study Material Contact Search
AI Chat FREE
  1. business
  2. finance
  3. asapthank you abc has 2.5 million shares outst

ASAPthank you ABC has 2.5 million shares outstanding at $40 per...

50.1K

Verified Solution

Question

Finance

ASAPthank you
image
ABC has 2.5 million shares outstanding at $40 per share. It has $100 milion debt. Its debt cost of capital is 9%, and its equity cost of capital is 18% Suppose the company decides to move to a more conservative debt policy. A year later, its D/E ratio is down to 1/2. The cost of debt has dropped to 8.5%. The company's business risk, opportunity cost of capital, and tax rate have not changed. a. What is the likely reason that the cost of debt decreases after its D/E ratio is down to 1/2 ? [1 mark] b. What is the company's new WACC when its D/E ratio is 1/2? [2 marks] c. If the company's business risk and opportunity cost of capital have changed, does WACC remain the same as what you calculated in (b)? Why or why not? [2 marks]

Answer & Explanation Solved by verified expert
Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:
  • Unlimited Question Access with detailed Answers
  • Zin AI - 3 Million Words
  • 10 Dall-E 3 Images
  • 20 Plot Generations
  • Conversation with Dialogue Memory
  • No Ads, Ever!
  • Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Become a Member

Other questions asked by students