Question
Your Debt/Equity team is planning to buy all of SC's stock, and to refinance all of its debt. The company currently has $100MM debt outstanding
Your Debt/Equity team is planning to buy all of SC's stock, and to refinance all of its debt. The company currently has $100MM debt outstanding and the stock is for sale for $100MM. (wd = wE = 50%). Your team believes that the optimal wD for SC is 25%. Therefore, as part of your team's buy/refinance strategy, you will recapitalize the firm at T = 0 to have D = $50 and E = $150. How will the cost of equity capital (rE) and the cost of debt capital, (rD) change when moving from the existing to as-purchased financial structure? Choose one answer and one reason. Group of answer choices
Because the firm's leverage will be decreased, which will decrease its riskiness to both shareholders and lenders.
Not enough information is provided to answer this question.
Because the firm's leverage will be increased, which will increase its riskiness to both shareholders and lenders.
Because equity investors do not care about interest rates.
rD will be increased but rE will remain unchanged.
rE and rD will be increased
rE and rD will be reduced
Because the appropriate Beta's are not given.
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