Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
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Chapter 9, Problem 9.20P
Weighted average cost of capital (WACC) American Exploration Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently, it targets a 50-50 mix of debt and equity, but it is considering a target capital structure with 70% debt. American Exploration currently has 6% after-tax cost of debt and a 12% cost of common stock. The company does not have any
- a. What is American Exploration’s current WACC?
- b. Assuming that its cost of debt and equity remain unchanged, what will be American Exploration’s WACC under the revised target capital structure?
- c. Do you think that shareholders are affected by the increase in debt to 70%? If so, how are they affected? Are their common stock claims riskier now?
- d. Suppose that in response to the increase in debt, American Exploration’s shareholders increase their required return so that the
cost of common equity is 16%. What will its new WACC be in this case? - e. What does your answer in part b suggest about the tradeoff between financing with debt versus equity?
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American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently it targets a 50-50mix of debt and equity, but it is considering a target capital structure with
90% debt. American Exploration currently has 7% after-tax cost of debt and a 14% cost of common stock. The company does not have any preferred stock outstanding.
a. What is American Exploration's current WACC?
b. Assuming that its cost of debt and equity remain unchanged, what will be American Exploration's WACC under the revised target capital structure?
c. Do you think shareholders are affected by the increase in debt to
90%? If so, how are they affected? Are the common stock claims riskier now?
American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently it targets a 50-50 mix of debt and equity, but it is considering a target capital structure with 90% debt. American Exploration currently has 5% after-tax cost of debt and a 10% cost of common stock. The company does not have any preferred stock outstanding.
a. What is American Exploration's current WACC?
b. Assuming that its cost of debt and equity remain unchanged, what will be American Exploration's WACC under the revised target capital structure?
c. Do you think shareholders are affected by the increase in debt to 90%? If so, how are they affected? Are the common stock claims riskier now?
d. Suppose that in response to the increase in debt, American Exploration's shareholders increase their required return so that cost of common equity is 14%. What will its new WACC be in this case?
e. What does your answer in part d suggest…
American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently it targets a 50-50mix of debt and equity, but it is considering a target capital structure with
90% debt. American Exploration currently has 7% after-tax cost of debt and a 14% cost of common stock. The company does not have any preferred stock outstanding.
d. Suppose that in response to the increase in debt, American Exploration's shareholders increase their required return so that cost of common equity is 18%. What will its new WACC be in this case?
e. What does your answer in part d suggest about the tradeoff between financing with debt versus equity?
Chapter 9 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 9.1 - What is the cost of capital?Ch. 9.1 - Prob. 9.2RQCh. 9.1 - Prob. 9.3RQCh. 9.1 - What are the typical sources of long-term capital...Ch. 9.2 - Prob. 9.5RQCh. 9.2 - Prob. 9.6RQCh. 9.2 - Prob. 9.7RQCh. 9.3 - How would you calculate the cost of preferred...Ch. 9.4 - What premise about share value underlies the...Ch. 9.4 - How do the constant-growth valuation model and...
Ch. 9.4 - Why is the cost of financing a project with...Ch. 9.5 - Prob. 9.13RQCh. 9.5 - Prob. 9.14RQCh. 9.5 - Prob. 9.15RQCh. 9 - In the chapter opener you learned that Johnson ...Ch. 9 - Learning Goals 3, 4, 5, 6 ST9-1 Individual...Ch. 9 - Prob. 9.1WUECh. 9 - Prob. 9.2WUECh. 9 - Duke Energy has been paying dividends steadily for...Ch. 9 - Weekend Warriors Inc. has 35% debt and 65% equity...Ch. 9 - Oxy Corporation uses debt, preferred stock, and...Ch. 9 - Concept of cost of capital and WACC Mace...Ch. 9 - Prob. 9.2PCh. 9 - Before-tax cost of debt and after-tax cost of debt...Ch. 9 - Prob. 9.4PCh. 9 - The cost of debt Gronseth Drywall Systems Inc. is...Ch. 9 - After-tax cost of debt Bella Wans is interested in...Ch. 9 - Cost of preferred stock Taylor Systems has just...Ch. 9 - Cost of preferred stock Determine the cost for...Ch. 9 - Cost of common stock equity: CAPM Netflix common...Ch. 9 - Retained earnings versus new common stock Using...Ch. 9 - The effect of tax rate on WACC K. Bell Jewelers...Ch. 9 - WACC: Market value weights The market values and...Ch. 9 - WACC: Book weights and market weights Webster...Ch. 9 - WACC and target weights After careful analysis,...Ch. 9 - Cost of capital Edna Recording Studios Inc....Ch. 9 - Calculation of individual costs and WACC Dillon...Ch. 9 - Prob. 9.18PCh. 9 - Calculation of individual costs and WACC Lang...Ch. 9 - Weighted average cost of capital (WACC) American...Ch. 9 - Prob. 9.21PCh. 9 - Eco Plastics Company Since its inception, Eco...
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