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Under the assumptions of Modigliani and Miller's original paper, a firm's stock price will be maximized at 100% . Signaling theory implies that a firm with extremely favorable prospects will be more likely to issue to fund any new projects. When a firm announces a new stock offering, the price of its stock will usually When information is managers have more information about a firm's prospects than investors do. General Forge and Foundry Corporation currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm's unlevered beta is 1.1, and its cost of equity is 13.35%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 13.35%. The risk-free rate of interest (PRF) is 4%, and the market risk premium (RP) is 8.5%. General Forge's marginal tax rate is 40%. General Forge is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. Bond Rating Before-Tax Cost of Debt (rd) D/A Ratio 0.0 0.2 0.4 E/A Ratio 1.0 0.8 0.6 Levered Beta (b) 1.1 D/E Ratio 0.00 0.25 0.67 1.50 WACC 13.35% 12.85% A BBB Cost of Equity (rs) 13.35% 14.80% 17.09% L 3 5.79% 8.4% 8.9% 11.1% 14.3% 0.4 1.54 2.09 3.74 12.70% 0.8 0.2 C

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