Mind Tap . Cengage tea × ng.cengage.com/static/nb/uifindex.htmltnbld-607674&mbNo
ID: 2786137 • Letter: M
Question
Mind Tap . Cengage tea × ng.cengage.com/static/nb/uifindex.htmltnbld-607674&mbNodeld-2225245328elSBN-978130563597518parentld-222525022; on page | Based on your understanding of the capital structu"ENo results I Options MINDTAP Assignment 13-Capital Structure and Leverage Due on Nov 15at 11:59 PM CST Blue Ram Brewing Company currently has no debt in its capital structure, but it is considering using some debt and reducing its outstanding equity. The firm's unlevered beta is 1.2, and its cost of equity is 12.40%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 12.40%. The risk-free rate of interest (r) is 4%, and the market risk premium (RP) is 7%. Blue Ram's marginal tax rate is 30%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. Before-Tax D/A E/A Ratio Ratio D/E RatioRating Bond Cost of Debt Levered Cost of (rd) Beta (b) 1.2 Equity (rs)WACC 12.40% 13.87% 12.27% 12.28% 13.15% 12.40% 0.0 1.0 0.2 0.8 0.4 0.6 0.6 0.4 0.8 0.2 0.00 0.25 0.67 1.50 8.4% 8.9% 1.76 2.46 4.56 21.22% 14.3% 35.92% [ 15.19% ]Explanation / Answer
D / E = (D / A) / (E / A)
for D / A = 0.8
E / A = 0.2
D / E = 0.8 / 0.2
= 4