Gator Fabrics Inc

question 24

Multiple Choice

Gator Fabrics Inc. currently has zero debt . It is a zero growth company, and additional firm data are shown below. Now the company is considering using some debt, moving to the new capital structure indicated below. The money raised would be used to repurchase stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, by how much would the WACC change, i.e., what is WACCOld - WACCNew?
Wd 55% Orig. cost of equity, rs 10.0%
Wc 45% New cost of equity = rs 11.0%
Interest rate new = rd 7.0% Tax rate 40%

• A) 2.74%
• B) 3.01%
• C) 3.32%
• D) 3.65%
• E) 4.01%

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Definitions:

Prejudged

To make a decision or form an opinion about something or someone in advance, without sufficient evidence or through bias.

Worthy of Friendship

A term used to describe individuals or entities that possess qualities making them desirable or valuable as friends.

Virtuous

Having or showing high moral standards, including traits such as integrity, courage, and honesty.

Society

A structured community of people bound together by similar traditions, institutions, or nationality.