Gator Fabrics Inc

question 14

Multiple Choice

Gator Fabrics Inc. currently has zero debt. It is a zero growth company, and it has the data shown below. Now the company is considering using some debt, moving to the new debt/assets ratio 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? New Debt/Assets 55% Orig. cost of equity, rs 10.0%
New Equity/Assets 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:

Right-Skewed

Refers to a distribution where the tail on the right side of the histogram is longer or fatter than the left side.

Standard Deviation

A metric that quantifies the degree of spread or scattering among values in a dataset, illustrating the extent to which these values diverge.

Mean

The average value of a set of numbers, calculated by summing them up and dividing by the count of numbers.

Normally Distributed

A type of distribution in statistical theory where data is symmetrically distributed around a mean value, resembling a bell curve.