Refer back to Problem 14 15 Assume that Ybor s management is
Refer back to Problem 14-15. Assume that Ybor’s management is considering a change in the firm’s capital structure to include more debt. Management would therefore like to analyze the effects of an increase in the debt/assets ratio to 60 percent. The treasurer believes that such a move would cause lenders to increase the required rate of return on new bonds to 12 percent and that rs would rise to 14.5 percent.
a. How would this change affect the optimal capital budget?
b. If rs rose to 16 percent, would the low-return project be acceptable?
c. Would the project selection be affected if the dividend was reduced to $1.88 from $3.00, still assuming rs = 16 percent?

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