ABC is now considering changing the debt ratio and moving it to the new debt/assets ratio...

 

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ABC is now considering changing the debt ratio and moving it to the new debt/assets ratio as indicated below, and replacing all preferred stocks with debt. The money raised would be used to repurchase preferred stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, (a) By how much would the WACC change, i.e., what is au (WACC (in question (1) or (2)) - WACC (in question (3))? New Debt/Assets New Equity/Assets 45% 55% Interest rate new - 54 New cost of equity - 5 (b) Based on the Hamada equation, used no debt, i.e., what is its unlevered beta? WACC 7.0% 13.0% what would the firm's beta be if it ABC is now considering changing the debt ratio and moving it to the new debt/assets ratio as indicated below, and replacing all preferred stocks with debt. The money raised would be used to repurchase preferred stock at the current price. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on equity to rise somewhat, as indicated below. If this plan were carried out, (a) By how much would the WACC change, i.e., what is au (WACC (in question (1) or (2)) - WACC (in question (3))? New Debt/Assets New Equity/Assets 45% 55% Interest rate new - 54 New cost of equity - 5 (b) Based on the Hamada equation, used no debt, i.e., what is its unlevered beta? WACC 7.0% 13.0% what would the firm's beta be if it

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To calculate the changes in the Weighted Average Cost of Capital WACC and ... View the full answer