Refer back to Problem 14-15. Assume that Ybors management is considering a change in the firms capital

Question:

Refer back to Problem 14-15. Assume that Ybor’s management is considering a change in the firm’s capital structure to include more debt. Management would therefore like to analyze the effects of an increase in the debt/assets ratio to 60 percent. The treasurer believes that such a move would cause lenders to increase the required rate of return on new bonds to 12 percent and that rs would rise to 14.5 percent.

a. How would this change affect the optimal capital budget?

b. If rs rose to 16 percent, would the low-return project be acceptable?

c. Would the project selection be affected if the dividend was reduced to $1.88 from $3.00, still assuming rs = 16 percent?

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...