Attempts: Keep the Highest: 9 7. Capital structure theory Aa Aa Under the assumptions of Modigliani and Miller's original paper, a firm's stock price will be maximized at 100% that a firm with extremely favorable prospects will be more likely to issue offering, the price of its stock will usually prospects than investors do. Signaling theory implies to fund any new projects. When a firm announces a new stock When information is ,managers have more information about a firm's Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity firm's unlevered beta is 1.1, and its cost of equity is 12.35%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 12.35%. The risk-free rate of interest (nr) is 396, and the market risk premium (RP) is 8.5%, Blue Ram's marginal tax rate is 30%. Blue Ram is examining how different levels of debt will affect its costs of debtand equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. Before-Tax Cost of Debt Lvered Bond D/A E/A Ratio Ratio D/E Ratio Rating Cost of Beta (b) Equity (rs WACC 0.0 0.2 0.4 0.6 0.8 0.00 0.25 0.67 1.50 12.35% 13.97% 16.69% 12.35% 0.8 0.6 0.4 0.2 8.496 12.35% 8.996 1.61 2.26 4.18 13.55% 14.3% 38.53%