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 targets a 50 50 mix of debt and equity, but it is considering a target capital structure with 70 debt American Exploration currently ...

a WACC 050 006 050 012 003 006 009 or 90 b WACC 070 006 030 012 0042 0036 0078 or 78 c They are ...

Weighted average cost of capital American Exploration, Inc., a natural gas producer, is trying to decide whether

Question:

Weighted average American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its target Currently, it targets a 50-50 mix of debt and equity, but it is considering a target with 70% debt. American Exploration currently has 6% after-tax 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. Assuming that its and equity remain unchanged, what will be American Exploration's WACC under the revised target Do you think that shareholders are affected by the increase in debt to 70%? If so, how are they affected? Are their 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 16%. What will its new WACC be in this case?
e. What does your answer in part b suggest about the trade-off between financing with debt versus equity?
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...