Question #4 - Reading 18 Corporate Restructuring

Reading: Reading 18 Corporate Restructuring

PDF File: Reading 18 Corporate Restructuring.pdf

Page: 3

Status: Unattempted

Shared Context

- Using data in Financial Statements (€ thousands) for the Year Ended December 31, 20X2 , Company P's consolidated-debt-to-EBITDA ratio after acquisition will most likely: A) increase. B) decrease. C) remain the same.

Question

Which of the following statements about Company P's WACC is most accurate?

Answer Choices:

A. Weights of debt and equity are calculated using most recent book values, and include any financing raised or additional equity issued

B. The cost of debt will depend on the historical cost of debt of Company P only

C. Several factors influence the cost of debt: profitability, volatility of EBITDA, leverage, collateral, and so on

Explanation

Several factors influence cost of debt: profitability (EBITDA to sales, or EBIT to sales), volatility of revenues or EBITDA, leverage (debt to EBITDA), collateral (asset specificity, liquidity, existence of an active market), and prevailing interest rates. Weights of debt and equity are calculated using market values, and include any financing raised or additional equity issued.

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