Question
Using Excel (if applicable), Wells Fargo currently finances with 20% debt but its new CFO is considering changing the capital structure so as to increase
Using Excel (if applicable),
Wells Fargo currently finances with 20% debt but its new CFO is considering changing the capital structure so as to increase debt to 55% by issuing additional bonds and using the proceeds to repurchase and retire common shares. Management has determined this new increase in debt will achieve optimal capital structure given the current state of the economy. The company has a dividend policy such that it does not subscribe to a growth rate and instead pays all of its earnings out to shareholders. If the new capital structure adjustment is implemented, which drives EPS estimates to $4.75 per share, what should the firms new stock price be? Assuming this is the optimal capital structure, what is true about the new stock price and Wells Fargo's WACC?
| Risk-free rate | 2.00% | Tax rate, T | 20% |
| Return on the market portfolio | 10.00% | Current wd | 25% |
| Current beta | 1.05 | Target wd | 55% |
| New EPS | $4.75 |
|
|
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered 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
Personal Financial Planning
Authors: Randy Billingsley, Lawrence J. Gitman, Michael D. Joehnk
15th Edition
9780357438480
