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

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Definitions:

Pancreas

An organ in the abdominal cavity that plays a crucial role in digestion and the regulation of blood sugar by producing enzymes and hormones like insulin and glucagon.

Esophagus

A muscular tube that connects the throat to the stomach, transporting swallowed food and liquids.

Throat

The anterior part of the neck, housing the pharynx and vocal cords, and leading to the esophagus and larynx.

Pharynx

The muscular tube that connects the mouth and nasal passages with the esophagus and larynx, serving both respiratory and digestive functions.