Changes in Capital Structure. Refer again to problem 19. Suppose Big Oil starts from the financing mix in Table 4.13, and then borrows an additional $200 million from the bank. It then pays out a special $200 million dividend, leaving its assets and operations unchanged.

What happens to Big Oil’s WACC, still assuming it pays no taxes? What happens to the cost of equity?

problem 19

Changes in Capital Structure. Look again at our calculation of Big Oil’s WACC. Suppose Big Oil is excused from paying taxes. How would its WACC change? Now suppose Big Oil makes a large stock issue and uses the proceeds to pay off all its debt. How would the cost of equity change?