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Question 5 I. NRG Energy, Inc. ( NRG ) is an energy company with a market debt - equity ratio of 2 . Suppose its
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I. NRG Energy, Inc. NRG is an energy company with a market debtequity ratio of Suppose its current debt cost of capital is and its equity cost of capital is Suppose also that if NRG issues equity and uses the proceeds to repay its junior debt and reduce its debtequity ratio to it will lower its debt cost of capital to With perfect capital markets, what effect will this transaction have on NRGs equity cost of capital and WACC? What would happen if NRG issues even more equity and pays off its debt completely? How would these alternative capital structures affect NRGs enterprise value? marks
II Apple is considering expanding into a new product line. Earnings per share are expected to be $ in the coming year and are expected to grow annually at without the new product line but growth would increase to if the new product line is introduced. To finance the expansion, Apple would need to cut its dividend payout ratio from to If Apple's equity cost of capital is what would be the impact on Apple's stock price if they introduce the new product line? Assume the equity cost of capital will remain unchanged. marks
III. What options does a firm have to spend its free cash flow after it has satisfied all interest obligations marks
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