You are also considering an investment in another company, Company C. The market debt-equity ratio for Company C is 3. Suppose its current cost of debt is 6% and its cost of equity capital is 14%. If Company C issues equity to repay its debt and thus reduces its debt-equity ratio to 2, the cost of debt capital will be reduced to 5.5%. 

Assuming perfect capital markets, determine how this change will affect Company C's cost of equity and weighted average cost of capital (WACC). 

Determine what happens if Company C pays off its debt completely and how such capital restructuring activities would affect Company C's firm value.

Answer rating: 100% (QA)

Here is the analysis of Company Cs capital restructuring Original debtequity ratio 3 Cost of debt ... View the full answer