Question
Currently, OregonTronics has a capital structure consisting of 20% debt and 80% equity. OregonTronics debt currently has an 8% yield to maturity. The risk-free rate
Currently, OregonTronics has a capital structure consisting of 20% debt and 80% equity. OregonTronics debt currently has an 8% yield to maturity. The risk-free rate is 5%, and the market risk premium is 6%. Using the CAPM, OregonTronics estimates that its cost of equity is currently 12.5%. The company has a 40% tax rate.
- What is OregonTronics current WACC?
- What is the current beta of OregonTronics stock?
- What would OregonTronics beta be if the company had no debt in its capital structure?
OregonTronics financial staff is considering changing its capital structure to 40% debt and 60% equity. If the company went ahead with the proposed change, the yield to maturity on the company's bonds would rise to 9.5%. The proposed change will have no effect on the company's tax rate.
- What would be the company's new cost of equity if it adopted the proposed change in capital structure?
- What would be the company's new WACC if it adopted the proposed change in capital structure?
- Based on your answer to part E, would you advise OregonTronics to adopt the proposed change in capital structure?
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Mergers Acquisition And Other Restructuring Activities
Authors: Donald M. Depamphilis
6th Edition
123854857, 978-0123854858
