Ch 13: Assignment - Capital Structure and Leverage Minimizing the amount of debt in the firm's capital structure so that the firm can borrow money at a reasonable rate when good investment opportunities arise Increasing the amount of debt in the firm's target capital structure in the hope that higher debt service requirements will force managers to be more disciplined Funneling excess cash flows back to shareholders through stock repurchases Funneling excess cash flows back to shareholders through higher dividends Green Goose Automation Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm's unlevered beta is 1.25, and its cost of equity is 11.75%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 11.75%. The risk-free rate of interest (Rp) is 3%, and the market risk premium (RPM) is 7%. Green Goose's marginal tax rate is 25% Green Goose is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. Bond D/Cap Ratio E/Cap Ratio Before-Tax Cost of Debt (ra) levered Beta (b) 1.25 Cost of Equity (1) 11.75% 13.388% 0.0 1.0 D/E Ratio 0.00 0.25 0.67 1.50 WACC 11.75% 11.925% 0.8 0.2 0.4 .1 0.6 BBB 8.5% 1.875 16.125% 0.6 10.9 0,8 2.656 5,000 38.000% Grade It Now Save & Continue Contrue without saving