Weighted average cost of capital American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Currently it tatgets a 50-50 mix of debt and equity, but it is considering a target capital structure with 90% debt. American Exploration currently has 5% after-tax cost of debt and a 10% cost of common stock. The company does not have any preferred stock outstanding 2. What is American Exploration's current WACC? b. Assuming that is cost of debt and equity remain unchanged, what will be American Exploration's WACC under the revised target capital structure? c. Do you think shareholders are affected by the increase in debt to 90%? If so, how are they affected? Are the common stock claims riskier now? d. Suppose that in response to the increase in debt, American Exploration's shareholders increase their required return so that cost of common equity is 14%. What will its new WACC be in this case? e. What does your answer in part d suggest about the tradeoff between financing with debt versus equity? 2. American Exploration's current WACC under the 50-50 mix of debt and equity is I (Round to two decimal places) b. Assuming that its cost of debt and equity remain unchanged, American Exploration's WACC under the revised target capital structure of 90% debt and 10% equity s % (Round to two decimal places) t. Do you think shareholders are allected by the increase in debt to 90%? It so how are they alucted? (Select the best answer below) OA No shareholders have the right to increase their required rate of return, which in turn may lower the firm's risk of bankruptcy OB. Yes their common stock claims are risker now because larger interest expenses must be paid prior to any dividend payment. OC. Yes, shareholders benefit from the increase of debt financing because the interest expenses paid to bondholders are tax exempt OD. No only bondholders are affected because there is a greater chance that the firm may not be able to make the vidarest payments d. In response to the increase in debt. American Exploration's shareholders increase their required to go that cost of common equity is 145, the WACC In this case Round to be decimal places) What does your answer is part a suggest about the det between financing with debt vers une from the drop-down menu) Cated your owers din come to the increase in debt American Explorato this case Round to two decimal places What does your answer in and suggest about the trade between financing with debt versus equity? (Select from the drop-down menus Versing the percentage of our financing the niok of the company not being able to make its terest payments and can lead to shareholders incing the retum which the cost of equity captal