Refer to Exhibit 15

question 42

Multiple Choice

Refer to Exhibit 15.4.The 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

---

Definitions:

Variable Cost

Costs that change in proportion to the level of production activity or business operations.

Monthly Fixed Cost

Regular, consistent costs that do not vary with production volume or business activity level, calculated on a monthly basis.

Budgeted Sales

The projected amount of sales revenue that a company plans to achieve in a specific period, based on market analysis and company goals.

Ending Inventory

The monetary amount of merchandise on hand for sale when an accounting cycle concludes, established by the initial stock plus purchases less the expenses of goods sold.