Under the assumptions of Modigliani and Miller\'s original paper, a firm\'s stoc
ID: 2750612 • Letter: U
Question
Under the assumptions of Modigliani and Miller's original paper, a firm's stock price will be maximized at 100% Signaling theory imply Dural Brewing Co. currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The fir unlevered beta is 1.05, and its cost of equity is 12.93%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 12.93%. The risk-free rate of interest (rftr) is 4%, and the market risk premium (RP) is 8.5%. Drugal Brewing Co.'s marginal t rate is 40%. Dural Brewing Co. is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial Information that follows to analyze its weighted average cost of capital (WACC). Complete the following table.Explanation / Answer
Debt
Debt
Decrease
Asymmetric
D/E Ratio = 4.00
Levered Beta 1.1
Cost of Equity = 21%
WACC (for first missing number) = 11.75%
WACC (for second missing number) = 12.58%
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