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1. Corporation is privately owned and currently using only equity financing. The company's current market value is $2 billion, but management believes moving to an optimal financing mix would add $500 million in market value. If the optimal financing mix is determined to be 60% equity and 40% debt, how much total debt financing should Corporation use to reach its optimal financing mix?
a. $500 million
b. $800 billion
c. $1.2 billion
d. $1.5 billion
e. None of the above
2. This past year, the return on equity of Company A was 10.00%. Managment is considering moving from the company's current debt-to-capital ratio pf 20% to a projected optimal capital ratio of 45%. Wayne Products has a beta of 1.2, the current market rate of interest is 4.50%, and the market risk premium is 5.00%. Which of the following are true?
I. All else constant, moving to the optimal debt ratio will boost the company's return differential.
II. Based upon its recent return differential, the company can take its time moving to its optimal debt ratio.
III. Management can expect shareholder approval for moving to an optimal capital structure.
a. I only
b. I and II only
c. I and III only
d. II and III only
e. I, II, and III
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