Please I am asking you very kindly to help me with this problem 15-12 Reasearche
ID: 2695924 • Letter: P
Question
Please I am asking you very kindly to help me with this problem 15-12
Reasearcher Technology has consulted with investment bankers and determined the interest rate it would pay for different captial structures, as shown in the following table. Data for the risk-free rate, the market risk premuim an estimate of Reacher's unlevered beta, and tax rate are also shown. Based on this information what is the firm optimal capital structure, and what is the WACC at the optimal structure?
Percent financed with Debt (wd) Before Tax Cost Debt
0% 6.0%
10 6.1
20 7.0
30 8.0
40 10.0
5012.5
60 15.5
70 18.0
Input Data
Risk-free rate 4.5%
Market risk premium 5.5%
Unlevered beta 0.8
Tax Rate 40.0%
Explanation / Answer
Debt/Value:0% 10% 20% 30% 40% 50% 60% 70%
Equity/Value:1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3
Debt/Equity:0.00 0.11 0.25 0.43 0.67 1.00 1.50 2.33
WACC at optimum debt ratio = Optimum debt ratio = 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%
Levered Beta 1.00 0.90 0.80 0.70 0.60 0.50 0.40 0.30
Cost of Equity 0.00% 0.11% 0.25% 0.43% 0.67% 1.00% 1.50% 2.33% 9.22% 43%
WACC 0.00% 3.06% 6.13% 9.22% 12.34% 15.50% 18.75% 22.17%