Is Considering Moving to a Capital Structure That Is Comprised

question 17

Multiple Choice

is considering moving to a capital structure that is comprised of 30% debt and 70% equity, based on market values.The debt would have an interest rate of 8%.The new funds would be used to repurchase stock.It is estimated that the increase in risk resulting from the added leverage would cause the required rate of return on equity to rise to 12%.If this plan were carried out, what would be PP's new value of operations?

• A)$484,359
• B)$487,805
• C)$521,173
• D)$560,748
• E)$584,653

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Definitions:

Investor Risk Aversion

The tendency of investors to prefer lower-risk investments to avoid potential losses.

WACC

Weighted Average Cost of Capital, a calculation of a firm's cost of capital in which each category of capital is proportionately weighted.

Appropriate Discount Rate

The rate used to discount future cash flows to their present value to account for risk and time value of money, reflecting the opportunity cost of capital.

Interest Rate

The share of a loan incurred as interest costs to the borrower, habitually depicted as an annual percentage of the loan's outstanding amount.