The following numbers are given for a company's cost of financing:

 

Cost of debt=5%

Risk Free Rate= 4%

Cost of Equity is =15 %

 

The company needs 5 billion dollars to finance a new project which has a 0 dollar NPV but necessary to block the market to other companies. The company market value of equity is 150 Billion before and after the project. As the CEO of the company, you are a true supporter of trade off theory.

 

If the D/V ratio is 20%, how would you finance the project knowing that optimal capital structure is 20% D/V ratio? (Partition the required investment needed to debt and equity)

 

The board asked you to increase debt as they believe debt is cheaper.

As a shareholder I wonder why did not you use the internal cash (assume there is some) to finance the project ?

 

Can you provide convincing arguments to the board and the shareholder? 

Answer rating: 100% (QA)

In the given case the current DV ratio is 20 And required 5 billion additional capital to finance a ... View the full answer