Firm Is Considering Moving to a Capital Structure That Is

question 55

Multiple Choice

firm is considering moving to a capital structure that is comprised of 40% debt and 60% equity, based on market values.The new funds would be used to replace the old debt and to repurchase stock.It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on debt to rise to 7%, while the required rate of return on equity would rise to 9.5%.If this plan were carried out, what would be AJC's new WACC and total value?

• A)7.38%; $800,008
• B)7.38%; $813,008
• C)7.50%; $813,008
• D)7.50%; $790,008
• E)7.80%; $790,008

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Definitions:

Truck OEM

Original Equipment Manufacturer specializing in the production and design of trucks, providing the initial equipment and parts.

Navistar International

An American holding company that owns the manufacturer of International brand commercial trucks, buses, defense vehicles, and engines.

Hollow Box-Section

A hollow, box-shaped section of material, often metal or plastic, used in construction and manufacturing for its strength and lightweight characteristics.

Beam Axles

A type of axle design where a single piece runs across the vehicle, supporting the wheels on opposite sides, typical in certain trucks and older vehicles.