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Capital structure 1. With the help of the Excel spread sheet provided, compute the market debt to equity (D/E) ratio for HDC. Then use it
Capital structure 1. With the help of the Excel spread sheet provided, compute the market debt to equity (D/E) ratio for HDC. Then use it to compute the current cost of equity (rE) and the pretax-WACC for HDC. Assuming the cost of unlevered equity (ru) is 12%. (Hint: the market value of debt equals its book value; it is the sum of Long-Term Debt and Short-Term Debt.) At present Kyle is considering the following share repurchase proposal from the firm's CFO: the company could raise $5 billion new debt (on permanent basis) at a competitive rate of 0.58% to repurchase shares. 2. Compute the market DIE ratio, rE and pretax-WACC in this scenario. 3. Compare your results in Questions 1 and 2. Explain the relationship between capital structure and the cost of capital with no taxes (as if in perfect markets). How would the weight average cost of capital (WACC) differ if the effect of taxes is incorporated? Justify
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