Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

B.F. Pierce & Company is considering changing its capital structure. The company currently has no debt and no preferred stock, but it would like to

image text in transcribed

B.F. Pierce & Company is considering changing its capital structure. The company currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt-to- Market Equity-to- Market Debt-to- Before-Tax Cost of Value Ratio Value Ratio Equity Ratio Debt (wp) (we) (D/E) (rp) 0.00 1.00 0.00 5.00% 0.20 0.80 0.25 6.00% 0.40 0.60 0.67 7.00% 0.60 0.40 1.50 8.00% 0.80 0.20 4.00 9.00% The company uses the CAPM to estimate its cost of common equity. Currently the risk-free rate is 4%, the market risk premium is 6%, and the company's tax rate is 25%. The company estimates that its beta now (which is unlevered because it currently has no debt) is 0.8. Based on this information, what is the firm's weighted average cost of capital at its optimal capital structure? O 8.83% O 9.21% O 8.66% 09.07%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Entrepreneurial Finance

Authors: Philip J. Adelman, Alan M. Marks

4th Edition

0132434792, 9780132434799

More Books

Students also viewed these Finance questions

Question

List the major subtypes of the category older adults.

Answered: 1 week ago

Question

Describe real-time (active) data warehousing

Answered: 1 week ago