9. Ch16. The relationship between a firm's capital structure and other company attributes Which of the following are ways that a firm can reduce cash flows in order to prevent managers from wastefully spending excess cash flows? Check all that apply. Increasing the amount of debt in the firm's target capital structure in the hope that higher debt-service requirements will force managers to be more disciplined Minimizing the amount of debt in the firm's capital structure so that the firm can borrow money at a reasonable rate when good investment opportunities arise Funneling excess cash flows back to shareholders through stock repurchases Funneling excess cash flows back to shareholders through higher dividends Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering adding some debt and reducing the percentage of outstanding equity in its capital structure. The firm's current (unlevered) beta is 1.30, and its cost of equity is 12.60. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 12.60. The risk-free rate of interest (IRF) is 3.5%, and the market risk premium (RPM) is 7%. Blue Ram's marginal tax rate is 30%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its WACC. Complete the following table. Market debt to equity ratio ( Market debt to equity ratio ( Market debt to equity ratio ( Wd) Ws) D/S) Bond Rating Before-Tax Cost of Debt ( Id) Levered Beta (b) Cost of Equity (51) WACC 0.0 1.0 0.00 1.30 12.60% 12.60% 0.2 0.8 0.25 A 8.40% 14.21% 12.54% 0.4 0.6 0.67 BBB 8.90% 1.91 16.87% 0.6 0.4 1.50 BB 11.10% 2.67 13.54% 0.8 0.2 14.30% 4.94 38.08%