The firm currently has 1 million shares outstanding at $ 20 per share (tax rate = 40%).

a. What is the firm's optimal debt ratio?

b. Assuming that the firm restructures by repurchasing stock with debt, what will the value of the stock be after the restructuring?

8. GenCorp, an automorive parts manufacturer, currently has $25 million in outstanding debt and has 10 million shares outstanding. The book value per share is $10, while the market value is $ 25. The company is currently rated A, its bonds have a yield to maturity of 10%, and the current beta of the stock is 1.06. The six-month T.Bill rate is 8% now, and the company's tax is 40%.

a. What is the company's current weighted average cost of capital?

b. The company is considering a repurchase of 4 million shares at $25 per share with new debt. It is estimated that this will push the company's rating down to a B (with a yield to maturity of 13%). What will the company's weighted average cost of capital be after the stock repurchase?

9. You have been called in as a consultant for Herbert's Inc., a sporting good retail firm, which is examining its debt policy. The firm currently has a balance sheet as follows: Liability Assets

LT Bonds $100 Fixed Assets

Equity $300 Current Assets

Total $400 Total

The firm's income statement is as follows:

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