Capital Structure Theory

The finance director of AQR Co has heard that the market value of the company will increase if the weighted average cost of capital of the company is decreased. The company, which is listed on a stock exchange, has 100 million shares in issue and the current ex div ordinary share price is $2.50 per share. AQR Co also has in issue bonds with a book value of $60 million and their current ex interest market price is $104 per $100 bond. The current after-tax cost of debt of AQR Co is 7% and the tax rate is 30%.

The recent dividends per share of the company are as follows.

Harpoon Co is planning to raise $14.4m through a rights issue. The chief financial officer of Harpoon has analyzed that it would take a 20% discount on the market price of share, which is currently $4.5, to make the new issue of shares fully subscribed.  The rights issue will be on a 1 for 5 basis and issue costs of 2% on the cash raised will be paid out of the cash raised. The capital structure of Harpoon Co is as follows: