Question 7

Assume that Adobe management decides to quickly re-capitalize and move to D/V = 5%; E/V = 95%. As the result of recapitalization, the Cost of debt of ADBE will likely change: It will either increase or decrease by 0.25%. [That is, either add or deduct 0.25% to/from the current Cost of debt estimate you presented in Q6. NOTE: You have to pick only one of the possibilities the one that is FAR more likely to happen. Explain in 1 sentence why you picked increase or decrease].

Estimate the WACC the company will have if it quickly recapitalizes.

Based on what you just learned about the company and its potential WACCs: if the main goal of ADBE is to maximize the value of the company and its projects will the recapitalization be (i) beneficial, (ii) detrimental or (iii) value-neutral for the company? [Pick one of the choices and give a 1-2 sentence explanation for your reasoning.]