Solution-How will financial leverage affect business risk

How will financial leverage affect business risk

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Question - Diamond Company is in the process of determining its target capital structure. Its financial manager believes that the optimal capital structure consisting of debt and equity is between 20% and 50%. One of the finance staff compiles projected stock price and earnings per share (EPS) with various debt levels as follows:

Debt/ Equity Ratio	EPS Projection	Stock Price Projection
20%	Rp3.200	Rp35.000
30%	3.450	36.500
40%	3.750	36.250
50%	3.500	35.500

Required -

a. If Diamond Company uses only debt and common stock, at which ratio is the optimal capital structure?

b. At which level of the ratio is the minimum WACC?

c. How can the capital structure change? Explain the condition

d. How will financial leverage affect business risk?

e. Explain how capital structure affects WACC?

Reference no: EM133094685

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How will financial leverage affect business risk

Reference no: EM133094685

Reference no: EM133094685

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