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Consider the following data towards a firm's potential leverage. Assume that the firm can lever up in increments of 10% of firm value upto
Consider the following data towards a firm's potential leverage. Assume that the firm can lever up in increments of 10% of firm value upto 60% debt in the capital mix. Further assume that the CAPM holds. How much debt should the firm use to minimize its financing cost? Corporate Income tax rate Asset beta Treasury instrument rate Expected return on market portfolio Debt/Value Credit rating for the debt 0% AAA 10% AA 20% A 30% A- 40% BAA 50% BBA 60% BBB >60% Junk 10% >60% 60% 0% 40% 20% 50% 30% 3 points 45% 1.2 6% 10% Credit spread 2% 4% 6% 8% 10% 14% 20% Credit not available
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