Technico has determined that its optimal capital structure is 40% debt, at which point its weighted cost of capital, ka, is 13.7%.Due to financial problems, the firm has decided to raise the proportion of debt to 50%, which will increase its weighted cost of capital to 14.4%.What is the effect on the stock price of Technico? The current dividend is $1.60 and the long-term growth rate of dividends is expected to be 8.5%.
A)Decrease $3.65
B)Decrease $3.96
C)Increase $3.65
D)Increase $3.96

Question

Quizplus · Accepted Answer

P₀ = $1.60(1.085)/(0.137 - 0.085) = $33.38
P₀ = $1.60(1.085)/(0.144 - 0.085) = $29.42

Technico Has Determined That Its Optimal Capital Structure Is 40