1.You have been asked by Finance Controller of Vega Limited to evaluate the existing capital structure of Vega Limited and suggest the optimal capital structure. As on March 31, 2020, Vega Limited had a debt-equity ratio of 3:2. The current beta of Vega Limited is 1.20. During the accounting year 2019-20, Vega Limited earned profit before interest and tax (PBIT) of Rs. 1000 crores. The corporate tax rate is 30%. The risk-free rate of interest is 5% per annum and the expected market risk premium is 10%.The following table summarizes the interest rates at different levels of debt for Vega Limited.

Debt Ratio

Interest Rate on Debt

0%

8%

20%

8.5%

40%

9%

60%

10%

80%

12%

a.Estimate the optimal capital debt ratio, using the cost of capital approach.

b.Explain what recommendations you will give to Finance Controller of Vega Limited regarding the change in capital structure of Vega Limited.