Reference no: EM132722383
Exploration, Inc., a natural gas? producer, is trying to decide whether to revise its target capital structure. Currently it targets a 50?-50 mix of debt and? equity, but it is considering a target capital structure with 90?% debt. Exploration currently has 6?% ?after-tax cost of debt and a 12?% cost of common stock. The company does not have any preferred stock outstanding.
a. What is? Exploration's current? WACC?
b. Assuming that its cost of debt and equity remain? unchanged, what will be? Exploration's WACC under the revised target capital? structure?
c. Do you think shareholders are affected by the increase in debt to 90?%? If? so, how are they? affected? Are the common stock claims riskier? now?
d. Suppose that in response to the increase in? debt,? Exploration's shareholders increase their required return so that cost of common equity is 16?%. What will its new WACC be in this? case?
e. What does your answer in part d suggest about the tradeoff between financing with debt versus? equity?
All the information is there.
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