Paxton Oil Company paid an annual dividend of $7/share this year. The firms common stock dividends grow at a consistent rate of 2 percent per year. Common stockholders currently require an annual return of 15% per year on their investment.

The company currently has a 50% debt - 50% equity capital structure. The firms CEO believes that by increasing debt, the company can leverage a higher return to shareholders. He is considering changing the capital structure to 70% debt 30% equity if such change would benefit the shareholders.

The firm estimates that if it increases the debt ratio, it will be able to increase its dividend growth to 4 percent per year and this growth will be sustained indefinitely thereafter. Due to a higher level of debt, the firms common stockholders will require a higher annual return of 18% per year on their stock investment.

Given the above information:

Find the firms stock price under the current capital structure

Find the firms stock price under the proposed capital structure

Given your answers to part (a) and (b), explain why the company should or should not change its capital structure