Weighted average cost of capital American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target capital structure. Curtently it Targets a 50-50 mix of debt and equity, but it is considering a target capital structure with 70% debt. American Exploration currently has 6% after-tax cost of debt and a 12% cost of common stock. The company does not have any preferred stock outstanding a. What is American Exploration's current WACC? b. Anuming that its 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 atfected by the increase in debt to 70%? If so, how are they affected? Are the common stock claims riskler now? d. Suppose that in response to the increase in debt, American Exploration's shareholders increase their required retum so that cost of common equity is 16%. What will us now WACC be in this case? e. What does your answer in part d suggest about the tradeoff between financing with debt versus equity? American Exploration's current WACC under the 50-50 mox of debt and equity % (Round to two decimal placha) b. Assuming that is cont of debt and equity remain unchanged, American Exploration's WACC under the revised target capital structure of 70% debt and 30% equihy is % (Round to two decimal places) 6. Do you think shareholders are affected by the increase in debt to 70%? If so, how are they affected? (Select the best answer below) A No only bondholders are affected because there is a greater chance that the fim may not be able to make the interent payments B. Yun, their common stock calms are vtikler now because tyger interest expenses must be paid prior to any dividend payment O No shareholders have the right to increase the required rate of return, which in turn may lower the firm's risk of bankruptcy OD. Yes, shareholders benefit from the increase of debt financing because the interest expenses paid to bondholders are tax exempt dropong to the increase in dobil American Exploration's shareholders increase their required return so that cost of common equity is 16% the new WACO In this cases Round to two decimal places) e. What does your answer in part d suggest about the tradeoff between financing with debt versus equity? (Select from the drop down meras) Increasing the percentage of debt financing the risk of the company not being able to make its interest payments and cari sad to shareholder Increasing their required return which raises the cost of equity capital. Click to select your answer(s)