The management of Tarantulagoodies is considering a reduction in the corporation’s debt ratio. The following information is available: Debt: $10,000,000, kd=7.5%, tax-rate=30% Common Stock: $23,000,000, b=1.2, RF=3.5%, E(RM)=10%. The issuance of $5,000,000 in common stock and repurchase of debt in that same amount is expected to result in the reduction in kd to7%. The impact of the action on the cost of equity is to be determined. Should management pursue the change in debt ratio? Why/why not?

The management of Tarantulagoodies is considering a reduction in the corporation’s debt ratio. The following information is available: Debt: $10,000,000, kd=7.5%, tax-rate=30% Common Stock: $23,000,000, b=1.2, RF=3.5%, E(RM)=10%. The issuance of $5,000,000 in common stock and repurchase of debt in that same amount is expected to result in the reduction in kd to7%. The impact of the action on the cost of equity is to be determined. Should management pursue the change in debt ratio? Why/why not?

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Description: Give typing answer with explanation and conclusion The management of Tarantulagoodies is considering a reduction in the corporation’s debt ratio. The following information is available: Debt: $10,000,000, kd=7.5%, tax-rate=30% Common Stock: $23,000,0

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

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