Question
5. JBL Industries is an all-equity financed corporation with a current 12% cost of capital and $200m market capitalization (risk-free rate is 5%, and the
5. JBL Industries is an all-equity financed corporation with a current 12% cost of capital and $200m market capitalization (risk-free rate is 5%, and the company's stock beta is 1). JBL business has become stable, and the firm has been generating a stable stream of cash in recent years. Management contemplates to replace 25% of the equity with debt through issuing risk-free debt and repurchasing stock. What would be the required return on equity after this change? Assume no taxes and efficient capital markets. [Reference: Mod 4, Capital Structure M&M Irrelevance mini-lecture]
A. 14.33%
B. 12.00%
C. 13.75%
D. 19.00%
6. The pecking order theory of capital structure implies that: [Reference: Mod 4, Capital Structure theories mini-lecture] I. When a firm uses external finance, it means that the firm did not have enough abundant internal finance II. Firms prefer debt to equity when using external finance III. Firms issue securities based on the trade-off between financial distress costs and interest tax savings
A. I
B. II
C. I, II
D. II, III
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