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 as rD.

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)

Period Ending: 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

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

Current Liabilities

Long-Term Debt $26,807,000 $24,267,000 $22,349,000 $20,789,000

Total Equity ($1,878,000) $1,454,000 $4,333,000 $6,316,000

3.Compute the cost of levered equity (rE) for Home Depot using their current market debt-to- equity ratio

4.Compute the current weighted average cost of capital (WACC) for Home Depot using their current debt-to-equity ratio.

5. Repeat Steps 3 and 4 for the two scenarios. analyze, issuing $1 billion in debt to repurchase stock, and issuing $1 billion in stock to repurchase debt. (Although 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 market D/E ratio in each of these cases?

6. Explain the relationship between capital structure and the cost of capital in this case.

7. What implicit assumptions in this case generate the results found in Question 5? How might the results differ in the "real world"?