Under the assumptions of Modigliani and Miller prime s original paper, a firm pr
ID: 2766310 • Letter: U
Question
Under the assumptions of Modigliani and Miller prime s original paper, a firm prime s stock price will be maximized at 100%_________. Signaling theory implies that a firm with extremely favorable prospects will be more likely to issue_________ to fund any new projects. When a firm announces a new stock offering, the price of its stock will usually__________. When information is__________, managers have more information about a firm prime s prospects than investors do. Drugal Brewing Co. currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm prime s unlevered beta is 1.05, and its cost of equity is 12.43%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 12.43%. The risk-free rate of interest (rRF) is 3.5%, and the market risk premium (RP) is 8.5%. Drugal Brewing Co. prime s marginal tax rate is 40%. Drugal 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
Answer :
Table D/A E/A D/E Bond Kd Beta cost of WACC Ratio Ratio Ratio rating debt cost equity 0 1 0.00 - - 1.05 12.43% 12.43% 0.2 0.8 0.25 A 8.10% 1.21 13.79% 12.00% 0.4 0.6 0.67 BBB 8.50% 1.47 16.00% 11.64% 0.6 0.4 1.50 BB 10.90% 2 20.50% 12.12% 0.8 0.2 4.00 C 13.90% 3.57 33.85% 13.44%Related Questions
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