Answer Happy

QUESTION THREE The CEO of Obelix Ltd, a utility firm specialtering in supplying green energy to households, is interested in the impact of adjusting the firm's borrowing policy to improve its financial strength in light of the competition in the energy sector. The CEO and you to provide a report that you will present to the board to offer workable financial policies for the firm The following table details the firm's current balance shoot. Note that there is no information about the cout of equity capital Value Cost of capital Totalssets 120m 10% Debt £40m Equity Com The CEO realize that by increasing the finn's debt burden, the cost of debt capital will rise as there is an increase in the bankruptcy risk of the firm. The following table estimates the link between the debteguity ratio and the cost of debt capital Debt Equity ratio Cost of debt 1/2 4.00% 5/7 4,02% 076 4.05% 75 4.10% 4.50% 8/4 The market data are as follow The risk free rato 3% The average return on the market 7% index Your report should address the following points. # What is the current cost of equity capital? (5 marks) b) Work out the cost of equity for a debt-equity ratio of one, as well as a debt-equity ratio of two. State the assumptions you make (10 marks) c) Explain what assumptions underpin the trade-off theory of borrowing Under what conditions should the firm increase its borrowing according to this theory (15 marks) d) The board is interested in learning about the various options for using borrowing, Outline the difference between, and the relative benefits of loans and bonds, fixed-rate and variable rate debt, and domestic-issued bonds and Eurobonds. (20 marks)