Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.

Health Care Advertising (For Healthcare Professionals only Please)
July 12, 2019
Proposing Recommendations from Clinical Data
July 12, 2019

Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.

5. Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage.

  1. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 6%. What will be the expected return of equity after this transaction?
  2. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon’s debt will be much riskier. As a result, the debt cost of capital will be 8%. What will be the expected return of equity in this case?
  3. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument?

6. Suppose Microsoft has no debt and a WACC of 9.2%. The average debt-to-value ratio for the software industry is 5%. What would be its cost of equity if it took on the average amount of debt for its industry at a cost of debt of 6%?

7. Your firm is financed 100% with equity and has a cost of equity capital of 12%. You are considering your first debt issue, which would change your capital structure to 30% debt and 70% equity. If your cost of debt is 7%, what will be your new cost of equity?

 

Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code “Newclient”


Hardmon Enterprises is currently an all-equity firm with an expected return of 12%. It is considering borrowing money to buy back some of its existing shares, thus increasing its leverage. was first posted on July 12, 2019 at 11:23 am.
©2019 "The Nursing Hub". Use of this feed is for personal non-commercial use only. If you are not reading this article in your feed reader, then the site is guilty of copyright infringement. Please contact me at ukbestwriting@gmail.com

 

"Is this question part of your assignment? We Can Help!"

Essay Writing Service