Capital structure is irrelevant under the conditions of perfect markets, demonstrate this point by showing that the weighted average cost of capital remains constant under various levels of debt. analyze relatively modest changes to Home Depot's capital structure. consider two scenarios: the firm issues $1 billion in new debt to repurchase stock, and the firm issues $1 billion in new stock to repurchase debt, and assuming a cost of unlevered equity(rU)of 12%.

the cost of debt capital rD may change with changes in leverage, for these modestly small changes, assume that rD remains constant. What is the relation between changing leverage and changing rD. What is the market D/E ratio in each of these cases? use the existing yield on the outstanding bond asrD.

1.Home Depot, Inc. (The) Common Stock (HD) Quote & Summary Data

The current stock price:$220.7927

Shares Outstanding:1,095,153,000

Coupon in %2.2766%Yield in %1.99%

Balance Sheet (values in 000's)Get Quarterly Data

Period Ending:

Trend

2/3/2019

1/28/2018

1/29/2017

1/31/2016

Current Assets

Cash and Cash Equivalents

$1,778,000

$3,595,000

$2,538,000

$2,216,000

Short-Term Investments

$0

$0

$0

$0

Net Receivables

$1,936,000

$1,952,000

$2,029,000

$1,890,000

Inventory

$13,925,000

$12,748,000

$12,549,000

$11,809,000

Other Current Assets

$890,000

$638,000

$608,000

$569,000

Total Current Assets

$18,529,000

$18,933,000

$17,724,000

$16,484,000

Long-Term Assets

Long-Term Investments

$0

$0

$0

$0

Fixed Assets

$22,375,000

$22,075,000

$21,914,000

$22,191,000

Goodwill

$2,252,000

$2,275,000

$2,093,000

$2,102,000

Intangible Assets

$0

$0

$0

$0

Other Assets

$847,000

$1,246,000

$1,235,000

$1,196,000

Deferred Asset Charges

$0

$0

$0

$0

Total Assets

$44,003,000

$44,529,000

$42,966,000

$41,973,000

Current Liabilities

Accounts Payable

$12,539,000

$11,628,000

$11,212,000

$10,531,000

Short-Term Debt / Current Portion of Long-Term Debt

$2,395,000

$2,761,000

$1,252,000

$427,000

Other Current Liabilities

$1,782,000

$1,805,000

$1,669,000

$1,566,000

Total Current Liabilities

$16,716,000

$16,194,000

$14,133,000

$12,524,000

Long-Term Debt

$26,807,000

$24,267,000

$22,349,000

$20,789,000

Other Liabilities

$1,867,000

$2,174,000

$1,855,000

$1,965,000

Deferred Liability Charges

$491,000

$440,000

$296,000

$379,000

Misc. Stocks

$0

$0

$0

$0

Minority Interest

$0

$0

$0

$0

Total Liabilities

$45,881,000

$43,075,000

$38,633,000

$35,657,000

Stock Holders Equity

Common Stocks

$89,000

$89,000

$88,000

$88,000

Capital Surplus

$10,578,000

$10,192,000

$9,787,000

$9,347,000

Retained Earnings

$46,423,000

$39,935,000

$35,519,000

$30,973,000

Treasury Stock

($58,196,000)

($48,196,000)

($40,194,000)

($33,194,000)

Other Equity

($772,000)

($566,000)

($867,000)

($898,000)

Total Equity

($1,878,000)

$1,454,000

$4,333,000

$6,316,000

Total Liabilities & Equity

$44,003,000

$44,529,000

$42,966,000

$41,973,000

2.Compute the market D/E ratio for Home Depot. Approximate the market value of debt by the book value of net debt; include both Long-Term Debt and Short-Term Debt/Current Portion of Long-Term Debt from the balance sheet and subtract any cash holdings. Use the stock price and number of shares outstanding to calculate the market value of equity.