Analysis of Debt used by a Firm with respect to Optimal Capital Structure

a. The process for the cost of debt assumes the times interest earned is a good proxy for measuring credit risk, what other financial variables, if any should be considered (is interest coverage the only variable that provides information about ability to pay? Are there other ratios that might help? Can interest coverage be misleading? given it uses EBIT not cash flow?) We adjust the interest coverage ratio assuming the total amount of debt is financed at the cost of debt in the chart (essentially refinancing all of the firms debt) is this realistic? - does this assumption limit the applicability of your results (if so, how)?

b. The base level of interest rates, the risk free rate, and yield spreads all change over time. How important are the changes in calculating the optimal level? Since the estimate is based on the current environment does it matter if these inputs change based on the economic environment? Do changes in these inputs increase or decrease the accuracy of estimate of the optimal capital structure why and/or how? The firm will likely not make drastic changes in its capital structure frequently do you think your estimate would remain relatively stable as these variables change or would it change frequently and how would that impact the firms decisions?

c. The starting value for beta may change over time, does this limit your results or is using the current beta an appropriate assumption (explain - how consistent do you think Beta is over time, how do changes in the market environment impact beta or do they?)?

d. The credit spreads can change as the broad economy changes. The spread used represent estimates of the current yield spreads based on a ten year maturity for different bond ratings, is this the best approach or would an average spread for each credit risk level be more appropriate.