Which of the following are ways that a firm can reduce cash flows in order to prevent managers from wastefully spending excess cash flows? Check all that apply.

Funneling excess cash flows back to shareholders through higher dividends

Minimizing the amount of debt in the firm$$s capital structure so that the firm can borrow money at a reasonable rate when good investment opportunities arise

Increasing the amount of debt in the firm$$s target capital structure in the hope that higher debt$-$service requirements will force managers to be more disciplined

Funneling excess cash flows back to shareholders through stock repurchases

Green Goose Automation Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm$$s unlevered beta is $1\mathrm{.}15,$ and its cost of equity is $11\mathrm{.}05\%.$ Because the firm has no debt in its capital structure, its weighted cost of capital $($WACC$)$ also equals $11\mathrm{.}05\%.$ The risk$-$free rate of interest $($rf

$)$ is $3\%,$ and the market risk premium $($rm

$-$ rf

$)$ is $7\%.$ Green Goose$$s marginal tax rate is $40\%.$

Green Goose is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted cost of capital $($WACC$).$ Complete the following table.

D$/$A Ratio

E$/$A Ratio

B$/$E Ratio

Bond Rating

Before$-$Tax Cost of Debt $($kd

$)$

Levered Beta $(\backslash$beta $)$

Cost of Equity $($ke

$)$

WACC

$0\mathrm{.}01\mathrm{.}00\mathrm{.}001\mathrm{.}1511\mathrm{.}05\%11\mathrm{.}05\%$

$0\mathrm{.}20\mathrm{.}80\mathrm{.}25$ A $8\mathrm{.}1\%1\mathrm{.}3912\mathrm{.}24\%10\mathrm{.}76\%$

$0\mathrm{.}40\mathrm{.}60\mathrm{.}67$ BBB $8\mathrm{.}5\%1\mathrm{.}6114\mathrm{.}27\%$

$0\mathrm{.}60\mathrm{.}41\mathrm{.}50$ BB $10\mathrm{.}9\%2\mathrm{.}1821\mathrm{.}91\%11\mathrm{.}23\%$

$0\mathrm{.}80\mathrm{.}24\mathrm{.}00$ C $13\mathrm{.}9\%3\mathrm{.}9130\mathrm{.}37\%$

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