Question
Green Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown in the following table.
Green 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 Greens unlevered beta, and the tax rate are also shown. Reacher expects zero growth. Based on this information, what is the firms optimal capital structure, and what is the weightedaverage cost of capital at the optimal structure?
Percent Financed with Debt (wd)Before-Tax Cost Debt (rd)
0% 5.0% 5% 7.20% 10% 7.50% 15% 7.70% 20% 9.50% 30% 13.5% 35% 16.5% 40% 17.0%
Other Input Data
Risk-free rate 7.5%
Market risk premium 4.5%
Unlevered beta 0.98
Tax rate 35%
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