FIN 101 SEU Week 14 American? Explorations Current? WACC Capital Structure Discussion

FIN 101 SEU Week 14 American? Explorations Current? WACC Capital Structure Discussion
College of Administrative and Financial Sciences
Assignment 3
Principles of Finance (FIN101)
Deadline: End of Week 14 (5/12/2020 @ 23:59)
Course Name: Principles of Finance
Student’s Name:
Course Code: FIN101
Student’s ID Number:
Semester: 1st
Academic Year: 1441/1442 H, 1st Term
For Instructor’s Use only
Instructor’s Name:
Students’ Grade: /5
Level of Marks: High/Middle/Low
• This assignment is an individual assignment.
• The Assignment must be submitted only in WORD format via the allocated folder
on Blackboard.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work transparent and well presented. This also
includes filling in your information on the cover page.
• Students must mention question number clearly in their answers.
• Late submitted assignments will NOT be entertained.
• Avoid plagiarism. The work should be in your own words; copying from students
or other resources without proper referencing will result in ZERO marks. No
• All answered must be typed using Times New Roman (size 12, double-spaced)
font. No pictures containing text will be accepted and will be considered
Submissions without this cover page will NOT be accepted.
Assignment Question(s):
(Marks 5)
Q1. American Exploration, Inc., a natural gas producer, is trying to decide whether to revise its
target capital structure. Currently it targets a 50-50 mix of debt and equity, but it is considering a
target capital structure with 70% debt. American Exploration currently has 6% after-tax cost of
debt and a 12% cost of common stock. The company does not have any preferred stock
outstanding. (2 Marks)
What is American Exploration’s current WACC?
Assuming that its cost of debt and equity remain unchanged, what will be American
Exploration’s WACC under the revised target capital structure?
Do you think shareholders are affected by the increase in debt to 70%? If so, how are they
affected? Are the common stock claims riskier now?
Suppose that in response to the increase in debt, American Exploration’s shareholders
increase their required return so that cost of common equity is 16%. What will its new WACC be
in this case?
Q2. What is the significance of voting rights to the ordinary shareholders? What is a proxy? Why
do proxy fights occur? (1 Mark)
Q3. Briefly explain the factors that influence the planning of the capital structure in practice. (1
Q4. ‘Bonus shares represent simply a division of corporate pie into a large number of pieces.’
Explain. (1 Mark)

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