The Firm Is Considering Moving to a Capital Structure That

question 16

Multiple Choice

The firm is considering moving to a capital structure that is comprised of 40 percent debt and 60 percent 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 riskiness resulting from the leverage increase would cause the required rate of return on debt to rise to 7 percent, while the required rate of return on equity would increase to 9.5 percent. 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