Question
I was given a 3-part question and I'm not sure how to do the third part The common stock and debt of Android Corp. are
I was given a 3-part question and I'm not sure how to do the third part
The common stock and debt of Android Corp. are valued at $47 million and $33 million, respectively. Investors currently require a 10% return on the common stock and an 6% return on the debt. There are no taxes.
a) WACC = 8.35
b) return on equity if the corporation issues an additional 14million of debt and uses this money to retire common stock = 11.7% (assuming capital structure does not affect risk of the debt, and knowing WACC = 8.35)
c) Suppose you prefer the original capital structure with a 10% return on the common stock and a WACC of 8.35%. If you have $1,500 to invest, how much should you invest in the stock and bonds of the restructured firm (which have returns of 11.7% and 6%, respectively)to obtain the same return as an investment in the stock of the original firm?
- Amount into equity = ?
- Amount into debt = ?
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