Question: DGF Corporation has come to you for some advice on

DGF Corporation has come to you for some advice on how best to increase their leverage over time. In the most recent year, DGF had an EBITDA of $300 million, owed $1 billion in both book value and market value terms and had a net worth of $2 billion (the market value was twice the book value). It had a beta of 1.30, and the interest rate on its debt is 8% (the Treasury bond rate is 7%). If it moves to its optimal debt ratio of
40%, the cost of capital is expected to drop by 1%.
a. How should the firm move to its optimal? In particular, should it borrow money and take on projects or should it pay dividends/repurchase stock?
b. Are there any other considerations that may affect your decision?


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  • CreatedApril 15, 2015
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