(Solution) - North Africa Exploration Inc a natural gas producer is trying -(2025 Original AI-Free Solution)

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North Africa 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 percent debt. North Africa Exploration currently has 6 percent after­tax cost of debt and a 12 percent cost of common stock. The company does not have any preferred stock outstanding.
a. What is North Africa Exploration's current WACC?
b. Assuming that its cost of debt and equity remain unchanged, what will be North Africa Exploration's WACC under the revised target capital structure?
c. Do you think shareholders are affected by the increase in debt to 70 percent? If so, how are they affected? Are their common stock claims riskier now?
d. Suppose that in response to the increase in debt, North Africa Exploration's shareholders increase their required return so that cost of common equity is 16 percent. What will its new WACC be in this case?
e. What does your answer in part b suggest about the tradeoff between financing with debt versus equity?