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1. Jones Co. presently is 100 percent equity financed. Company is regarding changing its capital structure. More specifically, Jones' CFO is considering a recapitalization plan in which firm would issue long-term debt with yield of 9% and use proceeds to repurchase common stock. Recapitalization would not change company's total assets nor would it affect company's basic earning power, which is presently 15%. CFO estimates that recapitalization will decrease company's WACC and increase its stock price. Which of given is also probable to happen if company goes ahead with planned recapitalization?

a. Company's net income will increase.
b. Company's earnings per share will decrease.
c. Company's cost of equity will increase.
d. Company's ROA will increase.
e. Company's ROE will decrease.

5. Which of the given statements is most right?

a. As debt financing raises firm's financial risk, increasing a company's debt ratio will always increase company's WACC.
b. As debt financing is cheaper than equity financing, increasing a company's debt ratio will always decrease the company's WACC.
c. Increasing a company's debt ratio will typically decrease marginal costs of both debt and equity financing; though, it still may raise company's WACC.
d. Statements a and c are right.
e. None of statements above are right

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  • Reference No.:- M917110

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