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A mining company must choose its optimal capital structure. Currently, the firm has a 40 percent debt ratio and the firm expects to generate a common stock dividend of $4.89 per share next year. The firms common stock dividends are expected to grow at a constant rate of 5 percent per year for the foreseeable future. Common stockholders currently require 10.89 percent annual return on their investment................ The company is considering changing its capital structure, if such change would benefit the shareholders. The firm estimates that if it increases the debt ratio to 50 percent, it will increase its expected common stock dividend to $5.24 per share next year. Because of the additional leverage, common stock dividend growth is also expected to increase to 6 percent per year and this growth will be sustained indefinitely thereafter. However, because of the added risk associated with a higher level of debt, the required return demanded by common stockholders will increase to 11.34 percent per year.
A. Find the companys share price under the current capital structure.
B. Find the share price under the proposed capital structure
C. Given answers to A and B, should the company change the firms capital structure, explain why yes or no?
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Executive style overview and summary, with the majority of your article review content in the Opinion and Analysis and Relevance to Corporate Valuation sections.
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