Q1. AmericanExploration, Inc., a natural gasproducer, is trying to decide whether to revise its target capital structure. Currently it targets a 50-50 mix of debt andequity, but it is considering a target capital structure with 70% debt. American Exploration currently has 6% after-tax cost of debt and a 12% cost of common stock. The company does not have any preferred stock outstanding. (2 Marks)

a. What is AmericanExploration's currentWACC?

b. Assuming that its cost of debt and equity remainunchanged, what will be American Exploration's WACC under the revised target capitalstructure?

c. Do you think shareholders are affected by the increase in debt to 70%? Ifso, how are theyaffected? Are the common stock claims riskiernow?

d. Suppose that in response to the increase indebt, AmericanExploration's shareholders increase their required return so that cost of common equity is 16%. What will its new WACC be in thiscase?

Q2. What is the significance of voting rights to the ordinary shareholders? What is a proxy? Why do proxy fights occur? (1 Mark)

Q3. Briefly explain the factors that influence the planning of the capital structure in practice. (1 Mark)

Q4. 'Bonus shares represent simply a division of corporate pie into a large number of pieces.' Explain. (1 Mark)