Business, 05.07.2020 14:01 itscheesycheedar

Hardmon Enterprises is currently an all-equity firm with an expected return of 11.6%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets. Required:a. Suppose Hardmon borrows to the point that itsâ€‹ debt-equity ratio is 0.50. With this amount ofâ€‹ debt, the debt cost of capital is 5%. What will be the expected return of equity after thisâ€‹transaction?b. Suppose instead Hardmon borrows to the point that itsâ€‹debt-equity ratio is 1.50. With this amount ofâ€‹ debt, Hardmon's debt will be much riskier. As aâ€‹ result, the debt cost of capital will be 7%. What will be the expected return of equity in thisâ€‹case?c. 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 thisâ€‹ argument?

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Hardmon Enterprises is currently an all-equity firm with an expected return of 11.6%. It is consider...

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