Question
ABC corporation's CFO decided to reevaluate its capital structure. Currently, ABC's stock trades for $30 a sHARE, AND 1 BILLION SHARES ARE OUTSTANDING. ABC's market
ABC corporation's CFO decided to reevaluate its capital structure. Currently, ABC's stock trades for $30 a sHARE, AND 1 BILLION SHARES ARE OUTSTANDING. ABC's market value of debt is $10 billion. we do not have any coupon or yield-to maturity information for ABC's debt. we also information on ABC's bond rating! However, ABC's beta is 1.2. ABC's income statement shows that its marginal tax rate is 35, its EBIT is 51.5 billion, and total interest paid currently is $300 million. At the moment risk- free rate is 3% and market risk premium is 5%. The CFO wants to compare ABC's current capital structure with the proposed 50-50 (Debt/equity) capital structure and select the better one. CFO assumes that the new debt will have the same cost of Debt ABC currently has. Please assume the role of CFO and show which capital structure should be selected?
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