Business, 03.09.2021 20:40 zoeedadoll

Wildcat Pizza, Inc. 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. Wildcat currently has 6% after-tax cost of debt and a 12% cost of common stock. The company does not have any preferred stock outstanding. Required:
a. What is Americanâ€‹ Exploration's currentâ€‹ WACC?
b. Assuming that its cost of debt and equity remainâ€‹ unchanged, what will be Americanâ€‹ Exploration's WACC under the revised target capitalâ€‹ structure?
c. Do you think shareholders are affected by the increase in debt to 70â€‹%? Ifâ€‹ so, how are theyâ€‹ affected? Are the common stock claims riskierâ€‹ now?
d. Suppose that in response to the increase inâ€‹ debt, Americanâ€‹ Exploration's shareholders increase their required return so that cost of common equity is 18â€‹%. What will its new WACC be in thisâ€‹ case?
e. What does your answer in part d suggest about the tradeoff between financing with debt versusâ€‹ equity?

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Wildcat Pizza, Inc. is trying to decide whether to revise its target capital structure. Currently, i...

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