Aaron Athletics is trying to determine its optimal capital structure. The companys capital structure consists of debt and common stock. In order to estimate the cost of capital, the company has produced the following table: Debt-to-total assets ratio (wd) Equity-to-total assets ratio (wc) Debt-to-equity ratio (D/E) Bond Rating Before-tax cost of debt (kd) 0.10 0.90 0.10/0.90=0.11 AA 7.0% 0.20 0.80 0.25 A 7.2% 0.30 0.70 0.43 A 8.0% 0.40 0.60 0.67 BB 8.8% 0.50 0.50 1.00 B 9.6% The companys tax rate is 40%. The company uses the CAPM to estimate its cost of equity, ks. The risk-free rate is 5% and the market risk premium (km-krf) is 6%. Aaron estimates that if it had no debt its beta would be 1.0 (Its unlevered beta = 1.0.) On the basis of this information, what is the companys optimal capital structure, and what is the firms WACC at this optimal capital structure?

Practice Final MBA 730 Problem 1. 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 capital, the company has produced the following table: The company's tax rate is 40%. The company uses the CAPM to estimate its cost of equity, ks. The risk-free rate is 5% and the market risk premium (kmkrf) is 6%. Aaron estimates that if it had no debt its beta would be 1.0 (Its unlevered beta =1.0.) On the basis of this information, what is the company's optimal capital structure, and what is the firm's WACC at this optimal capital structure