A firms weighted average cost of capital is 8.5% (WACC). Their total long-term debt to...
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Finance
A firms weighted average cost of capital is 8.5% (WACC). Their total long-term debt to equity ratio is 0.25. Assume the firm wants to significantly increase leverage in their business relative to equity and raises their long-term debt to equity ratio to 4.5.
Describe, with some detail, what effect this would have on both their cost of debt and the overall cost of capital (WACC)? Said another way, what specifically would drive/affect these changes in cost of debt/equity?
If you were opposed to this radical change, describe, at a high level, the process you would undertake to attempt to find the optimal capital structure rather than simply adding tons of leverage without a specific goal in mind.
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