Corporation moves to its optimal capital structure

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Reference no: EM132063975

1. Company is considering increasing its financial leverage to achieve an optimal capital structure. The firm plans to use the cost of capital approach to arrive at its decision. Company has a current market value of $383 million. The free cash flow to the firm (FCFF) is $22 million and the projected growth rate in FCFF is 5%. The company's current cost of capital is 12%, but this is expected to decrease to 11% at the optimal capital structure. Assume that the company has 2.5 million shares of stock outstanding after moving to its optimal debt ratio. By what amount is the firm's stock price expected to increase?

A. $.65 per share

B. $.70 per share

C. $.80 per share

D. $.95 per share

2. Corporation has a market value of equity of $25,000,000 and debt of $5,000,000. The firm plans to move to a new capital structure, which should reduce its weighted-average cost of capital from 14.00% to 12.00%. The firm anticipates having a constant growth rate in value of 5.00%. How much value can be expected to be realized if Corporation moves to its optimal capital structure?

A. $5,250,000

B. $7,500,000

C. $9,000,000

D. None of the above

Reference no: EM132063975

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