Q5. You have been asked to analyse the capit and make recommendations on a future course of action. al structure of DW ASA DW ASA million shares outstanding, selling at 20 per share and a ebt-equity ratio (in market value terms) of 0.25. The beta of the stock is 1.15, and the firm currently has a AA rating, with a corresponding market interest rate of 10%. The firm's income statement is as follows: EBIT Interest Exp. EBT Taxes Net Income 150 million 20 million 130 million 52 million 78 million The current riskfree rate is 8% and the market risk premium is 5.5%. a. What is the firm's current Weighted Average Cost of Capital? (5 marks) b. The firm is proposing borrowing an additional 200 million in debt and repurchasing stock. If it does so its rating will decline to A, with a market interest rate of 11%, what will the weighted Average Cost of Capital be if they make this move? (5 marks) c. What will the new stock price be if they borrow 200 million and repurchase stock (assuming rational investors)? (5 marks) See Next Page d. Now assume that the firm has another option to raise its debt/equity ratio (instead of borrowing money and repurchasing stock). It has considerable capital expenditures planned for the next year (150 million). The company also pays 1 in dividends per share currently (Current Stock Price-20). If the company finances all its capital expenditures with debt and doubles its dividend yield from the current level for the next year, what would you expect the debt/equity ratio to be at the end of the next year? (15 marks) (Total: 30 marks)