Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
14th Edition
ISBN: 9780133507690
Author: Lawrence J. Gitman, Chad J. Zutter
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 50-50 mix of debt and equity, but it is considering a target capital structure with 80% 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 equity remain unchanged, what will be American Exploratino's WACC under the revised target capital structure?C. Do you think shareholders are affected by the increase in debt to 80%? 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 18%. What will its new WACC be in this case?E. What does your answer in part D suggest about the tradeoff between financing…
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…
Chapter 9 Solutions
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
Ch. 9.1 - Prob. 1FOECh. 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. 1FOPCh. 9.5 - Prob. 9.13RQCh. 9.5 - Prob. 9.14RQCh. 9.5 - Prob. 9.15RQCh. 9 - Prob. 1ORCh. 9 - Learning Goals 3, 4, 5, 6 ST9-1 Individual...Ch. 9 - Prob. 9.1WUECh. 9 - Prob. 9.2WUECh. 9 - Prob. 9.3WUECh. 9 - Weekend Warriors Inc. has 35% debt and 65% equity...Ch. 9 - Oxy Corporation uses debt, preferred stock, and...Ch. 9 - Prob. 9.1PCh. 9 - Prob. 9.2PCh. 9 - Prob. 9.3PCh. 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 - Prob. 9.7PCh. 9 - Cost of preferred stock Determine the cost for...Ch. 9 - Prob. 9.9PCh. 9 - Prob. 9.10PCh. 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 - Prob. 9.15PCh. 9 - Cost of capital Edna Recording Studios Inc....Ch. 9 - Prob. 9.17PCh. 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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