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A firms weighted average cost of capital is 8.5% (WACC). Their total long-term debt to equity ratio is 0.25. Assume the firm wants to significantly
- A firms weighted average cost of capital is 8.5% (WACC). Their total long-term debt to equity ratio is 0.25. Assume the firm wants to significantly increase leverage in their business relative to equity and raises their long-term debt to equity ratio to 4.5.
- Describe, with some detail, what effect this would have on both their cost of debt and the overall cost of capital (WACC)? Said another way, what specifically would drive/affect these changes in cost of debt/equity?
If you were opposed to this radical change, describe, at a high level, the process you would undertake to attempt to find the optimal capital structure rather than simply adding tons of leverage without a specific goal in mind.
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