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6. Aaron Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate
6. Aaron Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table Debt to total assets ratio 0.1 0.2 0.3 0.4 0.5 Debt to equity ratio 0.11 0.25 0.43 0.67 1.00 Before tax cost of debt 6.00% 6.20% 7.00% 7.50% 9.00% The company's tax rate, T is 30%. The company uses the CAPM to estimate its cost of common equity, ks. The risk free rate is 6% and the market risk premium is 5%. Aaron estimates that if it had no debt its beta would be 1.0. (Beta unlevered equals 1) On the basis of above information, a. What is the firms average cost of capital (WACC) at each level of debt? b. The companies optimal capital structure is 90 Debt and % Equity and the firm's average cost of capital (WACC) at this optimal capital structure is 90
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