What is ixture of debt and equity used to fund expansion

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Reference no: EM131552448

A company has a $500 book value and a $600 market value. Its book value D/E ratio is 1.0 and its market value D/E ratio is 0.75. Its book value cost of debt is12% and its book value cost of equity is 25%. The market cost of debt is 15% and the market cost of equity is 30%. It is considering a $100 million expansion. It can borrow at the current cost of debt without market increasing its cost of equity, but if it funds the expansion using a D/E ratio higher than its market value D/E ratio, the cost of equity will increase to 35%. Its tax rate is 35%.

What is the mixture of debt and equity used to fund the expansion if it funds it using the market value D/E ratio?

What is the cost of capital used to evaluate this expansion if it funds it at the market value D/E ratio?

What is the mixture of debt and equity used to fund the expansion if it funds it using the book value D/E ratio?

What is the cost of capital used to evaluate this expansion if it funds it using the book value D/E ratio and the market value cost of debt?

Reference no: EM131552448

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