You work in the corporate finance
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You work in the corporate finance division of The Home Depot and your boss has asked you to review the firm’s capital structure. Specifically, your boss is considering changing the firm’s debt level.Your boss remembers something from his MBA program about capital structure being irrelevant, but isn’t quite sure what that means. You know that capital structure is irrelevant under the conditions of perfect markets and will demonstrate this point for your boss by showing that the weighted average cost of capital remains constant under various levels of debt. So, for now, suppose that capital markets are perfect as you prepare responses for your boss.
You would like to analyze relatively modest changes to Home Depot’s capital structure. You would like to consider two scenarios: the firm issues $1 billion in new debt to repurchase stock, and the firm issues $1 billion in new stock to repurchase debt. Use Excel to answer the following questions using Eq. 14.5 and Eq. 14.6, and assuming a cost of unlevered equity (rU) of 12 percent.
Obtain the financial information you need for Home Depot.
Go to www.nasdaq.com, click “Summary Quotes” on the left-hand side, and enter Home Depot’s stock symbol (HD). Click “Go.” From the Summary Quotes page, get the current stock price and number of shares outstanding.
Click “Company Financials” and the annual income statement should appear. Put the cursor in the middle of the statement, right-click your mouse, and select “Export to Microsoft Excel.” (You will not need the income statement until Chapter 15, but collect all of the back-ground data in one step.) Go back to the NASDAQ Web page and select the balance sheet.Export that to Excel as well and then cut and paste the balance sheet to the same worksheet as the income statement.
To get the cost of debt for Home Depot, go to NASD Bond Info...