A company has unleveraged beta of 1.7, risk free rate 7% and market risk premium for 5%. The applicable tax rate is 40%. The company needs to finance its new project having three different scenarios of financing:

Scenario Debt ratio Interest rate (before tax) EPS 1 0% 0% $2.7 2 20% 12% $3.8 3 80% 17% $4.2

2) If the company is unleveraged, its Price per share is *

$11.75

$22.41

$17.42

None of the above

3) If the company has 20% Debt, its WACC is *

15.34%

0%

14.86%

None of the above

4) If the company has 20% Debt, its Price per share is *

$11.7

$10.2

$24.7

None of the above

5) If the company is 80% leveraged, its WACC is *

0%

15.34%

14.86%

None of the above

6) The optimal capital structure for the company *

Maximizes its price per share

Minimizes its WACC

All of the above

None of the above

7) At the optimal capital structure; WACC is _____ and price per share is _____. *

14.86%; 22.65%

14.86%; $24.65

14.86%; $22.65

None of the above.

8) The optimal capital structure for the company is: *

0% debt; 100% equity.

20% debt; 80% equity.

80% debt; 20% equity.

All of the above