Question
The market-risk premium is estimated at 6% and the risk-free rate at 4%. Last year, Acmes equity beta was 3. You estimate the firms historical
The market-risk premium is estimated at 6% and the risk-free rate at 4%. Last year, Acmes equity beta was 3. You estimate the firms historical debt beta at 0.50. Acmes eective tax rate is 50%. This year, the firm is responding to the financial crisis by moving away from its historical target debt-to-assets ratio of 0.70 to a new lower target debt-to-assets ratio of 0.50. The decline in leverage under the new financial policy will lower the debt beta to 0.40. What was the WACC under the old financial policy with a debt-to-assets ratio of 0.70? What will be the WACC under the new financial policy with a debt-to-assets ratio of 0.50? Assuming firm cash flows were projected to grow at 2% per year each year under the old financial policy, how much higher cash flow growth rate would be needed in order for the change in financial structure to be optimal in the sense of increasing total firm value?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started