Technico has determined that its optimal capital structure is 40% debt, at which point its weighted cost of capital, k_a, 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

Solution: 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