(Answered) Question dgf corporation has come to you for some advice on

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Question: DGF Corporation has come to you for some advice on how best to increase their leverage over time. In the most recent year, DGF had EBITDA of $ 300 million, owed $ 1 billion in both book value and market value terms, and had a net worth of $ 2 billion (the market value was twice the book value). It had a beta of 1.30, and the interest rate on its debt is 8% (the treasury bond rate is 7%). If it moves to its optimal debt ratio of 40%, the cost of capital is expected to drop by 1%.

a. How should the firm move to its optimal? In particular, should it borrow money and take on projects or should it pay dividends/repurchase stock?

b. Are there any other considerations that may affect your decision?

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