What is the debt ratio after the change in structure? Who (if anyone) gains or loses? 15. Indicate what’s with the following arguments: the firm borrows more and debt becomes risky, both stockholders and “As bondholders demand higher rates of return. Thus by reducing the debt ratio we can reduce both the cost of debt and the cost of equity, making everybody better off.” borrowing doesn’t significantly affect the probability of financial “Moderate distress or bankruptcy. Consequently moderate borrowing won’t increase the expected rate of return demanded by stockholders.” 19. Archimedes Levers is financed by a mixture of debt and equity. You have the following information about its cost of capital: rE = ___ rD = 12% rA = ___ = 1.5 = ___ = ___ βE βD βA rf = 10% rm = 18% D/V = .5 Can you fill in the blanks?
What is the debt ratio after the change in structure? Who (if anyone) gains or loses? 15. Indicate what’s with the following arguments: “As the firm borrows more and debt becomes risky, both stockholders and bondholders demand higher rates of return. Thus by reducing the debt ratio we can reduce both the cost of debt and the cost of equity, making everybody better off.” “Moderate borrowing doesn’t significantly affect the probability of financial distress or bankruptcy. Consequently moderate borrowing won’t increase the expected rate of return demanded by stockholders.” 19. Archimedes Levers is financed by a mixture of debt and equity. You have the following information about its cost of capital: rE = ___ rD = 12% rA = ___ βE = 1.5 βD = ___ βA = ___ rf = 10% rm = 18% D/V = .5 Can you fill in the blanks?
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