Question
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? Debt/Value Credit rating for the debt 0% AAA 10% AA 20% A 30% A- 40% BAA 50% BBA 60% BBB >60% Junk 0% 10% 30% 60% 50% 20% Corporate Income tax rate Asset beta Treasury instrument rate Expected return on market portfolio O >60% 40% Credit spread 45% 1.2 6% 10% 2% 4% 6% 8% 10% 14% 20% Credit not available
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Engineering Economy
Authors: William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
15th edition
978-0132554909
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