Investment in the stock of the original firm

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The common stock and debt of Android Corp. are valued at $56 million and $36 million, respectively. Investors currently require a 14% return on the common stock and an 3% return on the debt. There are no taxes.

Calculate the weighted average cost of capital. 9.70%

If Android Corp. issues an additional $13 million of debt and uses this money to retire common stock, what will be the expected return on the stock? Assume that the change in capital structure does not affect the risk of the debt, and recall that the WACC under the initial capital structure is 9.7%.

Return on equity=17.33

Suppose you prefer the original capital structure with a 14% return on the common stock and a WACC of 9.7%. If you have $3,500 to invest, how much should you invest in the stock and bonds of the restructured firm (which have returns of 17.33% and 3%, respectively) to obtain the same return as an investment in the stock of the original firm?

Amount into equity=?

Amount into debt=?

Reference no: EM133062724

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