Build a Model: WACC and Optimal Capital Structure

Start with the partial model in the file Ch15 P12 Build a Model.xls on the textbooks Web site. Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown in the following table. Data for the risk-free rate, the market risk premium, an estimate of Reachers unlevered beta, and the tax rate are also shown. Based on this information, what is the firms optimal capital structure, and what is the weighted average cost of capital at the optimal structure?

Percent Financed with Before-Tax

With Debt (wd ) Cost Debt ( rd ) Input Data

0% 6.0% Risk-free rate 4.5%

10 6.1 Market risk premium 5.5%

20 7.0 Unlevered beta 0.8

30 8.0 Tax rate 40.0%

40 10.0

50 12.5

60 15.5

70 18.0