Suppose that a company, EFG, have too many debts and too little

equity. Its debt-to-equity(D/E) ratio is at the shocking level of 20, much higher

than average level of its peers in the same industry, which is only 10.

3.a (5 marks) If EFG starts to issue new equity to repay debts, how will its D/E

ratio be affected?

3.b (10 marks) If EFG starts to issue new equity to repay debts and to gradually

reduce its D/E ratio to 10, how would this affect the cost of debt, cost of equity,

and WACC of EFG?

3.c (10 marks) Suppose that EFG's D/E ratio has been reduced to 10. but EFG

continues to issue new equity to repay debts and plan to cut its D/E ratio to 5,

much lower than the industry average level. How would this affect the cost of debt,

cost of equity, and WACC of EFG?