A company issues bonds claiming that the proceeds will be invested in a safe project. However, it uses the proceeds for a risky investment. Which of the following statements is true? A The value of the debt will increase since the company is riskier. B Issuing the bonds decreases the financial risk of the firm because bonds are less risky than equities. Switching to a risky investment compromises the debtholders' interests. D Stockholders will be against the swtiching because their interests are compromised. E None of the above. Assume that you have just been hired as business manager of Campus Deli(CD), which is located adjacent to the campus. Its Free Cash Flow(FCF) is $400,000. Because the university's enrollment is capped, FCF is expected to be constant over time. Because no expansion capital is required, CD pays out all earnings as dividends. CD currently has no debt-it is an all-equity firmand its 100,000 shares outstanding selling at $40 per share. The firm's federal-plus-state tax rate is 21%. On the basis of statements made in your finance text, you believe that CD's shareholders would be better off if some debt financing was used. When you suggested this to your new boss, she encouraged you to pursue the idea but to provide support for the suggestion. In today's market, the risk-free rate is 6% and the market risk premium is 6%. CD's unlevered beta is 1.0. CD currently has no debt. so its cost of equity (and WACC) is 12%. If the firm was recapitalized, debt would be issued and the borrowed funds would be used to repurchase stock. After speaking with a local investment banker, you obtain the following estimates of the cost of debt at different debt levels in thousands of dollars): Debt Asset Ratio Bond Rating Yield . 0 0.125 AA 8.0% 0.250 A 9.0% 0.375 BBB 11.0% 0.500 BB 13.0% Now answer the following questions: 1) What is the optimal capital structure (or Debt/Asset ratio) in the above table? 2) What is the firm value under the optimal capital structure? 3) What is the stock price under the optimal capital structure? Submit an excel file showing your answers and steps. Following steps in the lecture is recommended