firm is considering moving to a capital structure that is comprised of 40% debt and 60% equity, based on market values.The new funds would be used to replace the old debt and to repurchase stock.It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on debt to rise to 7%, while the required rate of return on equity would rise to 9.5%.If this plan were carried out, what would be AJC's new WACC and total value?
A)7.38%; $800,008
B)7.38%; $813,008
C)7.50%; $813,008
D)7.50%; $790,008
E)7.80%; $790,008

Question

Quizplus · Accepted Answer

The WACC is calculated as (0.4 * 7%) + (0.6 * 9.5%) = 7.38%. The total value is given as $813,008.

Firm Is Considering Moving to a Capital Structure That Is