Firm: WESCO International

Capital Structure

Current Capital Structure

• Discuss the firms current capital structure
  • Before doing any calculations, do the firms current levels of debt and equity seem reasonable?

Firms Capital Structure Under Different World States

Note that many of the values needed for the equations below can be found in your previous projects (mostly project 4).

• Answer the following questions for each of the three scenarios listed below:
  1. Calculate the firms value (V_L) and ATWACC for scenario 2 and 3 world states given the firms current capital structure.
  2. What happens to the WACC and firm value if the debt level increases? Decreases? You do not need to show the calculations.
  3. Explain what the ideal capital structure for your firm would be under each scenario and discuss how the ideal capital structure differs from your firms current capital structure. Can be a rough estimate for the third world state.

Scenarios:

1. No taxes and no bankruptcy risk
   • No
2. Taxes, but no bankruptcy risk
3. Taxes and bankruptcy risk
   • Use the firms most recent tax shield as an estimate for PV(tax shield). Assume that the firm will have the same tax shield every year in perpetuity and the discount rate is your firms ATWACC.
   • Assume your firms PV(expected bankruptcy cost) is currently 10% less than the PV(tax shield)