Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as Free Cash Flow/required rate of return. Current Proposed Assets $10,000 $18,000 Debt $0 $8,000 Equity $10,000 $10,000 Debt/Equity ratio 0.00 1.00 Interest rate n/a 7% Shares outstanding 500 500 Share price $20 $20 (e ) If the company stock price goes up by 2% from announcing it is adding debt to expand the business, what effect does this have on the WACC?
Q1. Consider an all-equity firm that is contemplating going into debt. The market value of equity is calculated as
Current Proposed
Assets $10,000 $18,000
Debt $0 $8,000
Equity $10,000 $10,000
Debt/Equity ratio 0.00 1.00
Interest rate n/a 7%
Shares outstanding 500 500
Share price $20 $20
(e ) If the company stock price goes up by 2% from announcing it is adding debt to expand the business, what effect does this have on the WACC?
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