North Africa Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target

Question:

North Africa Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target Currently it targets a 50-50 mix of debt and equity, but it is considering a target with 70 percent debt. North Africa Exploration currently has 6 percent aftertax and a 12 percent cost of common stock. The company does not have any preferred stock outstanding.
a. What is North Africa Exploration's current WACC?
b. Assuming that its and equity remain unchanged, what will be North Africa Exploration's WACC under the revised target Do you think shareholders are affected by the increase in debt to 70 percent? If so, how are they affected? Are their claims riskier now?
d. Suppose that in response to the increase in debt, North Africa Exploration's shareholders increase their required return so that cost of common equity is 16 percent. What will its new WACC be in this case?
e. What does your answer in part b suggest about the tradeoff between financing with debt versus equity?
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...