5. You have been asked to analyze the capital structure of DASA Inc, and make recommendations on a future course of action. DASA Inc. has 40 million shares outstanding, selling at $20 per share and a debt-equity ratio (in market value terms) of 0.25. The beta of the stock is 1.05, and the firm currently has a AA rating, with a corresponding market interest rate of 10%.

The firm's income statement is as follows: EBIT $150 million

Interest Expense $ 20 million

Taxable Income $130 million

Taxes $ 52 million

Net Income $ 78 million

The current risk-free rate is 7% and the market risk premium is 5.5%. The firm's beta is 1.05.

a. What is the firm's current weighted average cost of capital?

b. The firm is proposing borrowing an additional $200 million in debt and repurchasing stock. If it does so its rating will decline to A, witha market interest rate of 11%. What will the Weighted average cost of capital be if they make this move?

c. What will the new stock price be if they borrow $200 million and repurchase stock (assuming rational investors)? (Current Stock Price=$20)

d. (more challenging) Now assume that the firm has another option to raise its debt/equity ratio (instead of borrowing money and repurchasing stock). It has considerable capital expenditures planned for the next year ($250 million). The company also pays $1 in dividends per share currently . If the company finances all its capital expenditures with debt and doubles its dividend yield from the current level for the next year, what would you expect the debt/equity ratio to be at the end of the next year.