How would you expect SC's cost of equity capital (rE) and the cost of debt capital, (rD) to change when moving from the existing to as-purchased financial structure? Choose one answer and one reason.

rE and rD will be reduced

rD will be increased but rE will remain unchanged.

Not enough information is provided to answer this question.

rE and rD will be increased

Because the firm's leverage will be decreased, which will decrease its riskiness to both shareholders and lenders.

Because the appropriate Beta's are not given.

Because equity investors do not care about interest rates.

Because the firm's leverage will be increased, which will increase its riskiness to both shareholders and lenders.

Consider this information for the remaining questions: Valuing a Perpetuity Entity for all Financial Stakeholders Be sure to carefully read the Introduction and the Hint (in red) before starting this problem. Introduction SpudsterCo (SC) is a profitable entity, capitalized with debt and equity operating in steady-state forever. Your Equity/Debt investor team is considering buying it and restructuring its debt. To execute this deal, the team will have to purchase 100% of SC's stock, and pay the principal on the entity's loan. (IE: When your team takes over the firm, the lender will exersize her "change of control put"). The asking price for 100% of the firm's stock is: $100 MM. The principle to be repaid on the loan is: $100 MM. Your team believes that an optimal capital structure for the firm would be: 40% D/(D+E). If your team proceeds with the SpudsterCo transaction: - The equity investors will pay (1-D/(D+E))% of the purchase price from their own funds. SpudsterCo will take out a long-term loan at the moment of close, provided by the debt investors on the team, to pay the current owners the rest of the purchase price, and to pay the existing loan principle. - The equity investors will operate SpudsterCo in its recapitalized steady-state forever. Hint: This is just like the problems presented in class and Practice Problems except The total cash that your team needs to raise (D+E) includes the amount needed to buy all the equity, and the amount needed to repay the principle owed on the exisiting debt. Consider this information for the remaining questions: Valuing a Perpetuity Entity for all Financial Stakeholders Be sure to carefully read the Introduction and the Hint (in red) before starting this problem. Introduction SpudsterCo (SC) is a profitable entity, capitalized with debt and equity operating in steady-state forever. Your Equity/Debt investor team is considering buying it and restructuring its debt. To execute this deal, the team will have to purchase 100% of SC's stock, and pay the principal on the entity's loan. (IE: When your team takes over the firm, the lender will exersize her "change of control put"). The asking price for 100% of the firm's stock is: $100 MM. The principle to be repaid on the loan is: $100 MM. Your team believes that an optimal capital structure for the firm would be: 40% D/(D+E). If your team proceeds with the SpudsterCo transaction: - The equity investors will pay (1-D/(D+E))% of the purchase price from their own funds. SpudsterCo will take out a long-term loan at the moment of close, provided by the debt investors on the team, to pay the current owners the rest of the purchase price, and to pay the existing loan principle. - The equity investors will operate SpudsterCo in its recapitalized steady-state forever. Hint: This is just like the problems presented in class and Practice Problems except The total cash that your team needs to raise (D+E) includes the amount needed to buy all the equity, and the amount needed to repay the principle owed on the exisiting debt