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Healthy Foods’ balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%. The yield to
Healthy Foods’ balance sheet shows a total of $25 million long-term debt with a coupon rate of 8.50%. The yield to
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maturity on this debt is 8.00%, and the debt has a total current market value of $27 million. The company has 10 million shares of stock, and the stock has a book value per share of $5.00. The current stock price is $20.00 per share, and stockholders’ required rate of return, rs, is 12.25%. The company recently decided that its target capital structure should have 35% debt, with the balance being common equity. The tax rate is 24%. What is the effect of the capital structure change on the WACC of the firm?
