home / study / business / finance / questions and answers / this problem is easiest to complete in excel. structure ... Question: This problem is easiest to complete in Excel. Stru... This problem is easiest to complete in Excel. Structure consists of only debt and common equity. XYZ's finance department staff created the following table showing the firm's debt cost at different debt levels:

Debt to Capital Ratio	Equity to Capital Ratio	Debt to Equity Ratio	Bond Rating	Before-Tax Cost of Debt
0.0	1.0	0.00	A	6.0%
0.2	0.8	0.25	BBB	7.0%
0.4	0.6	0.67	BB	9.0%
0.6	0.4	1.50	C	11.0%
0.8	0.2	4.00	D	14.0%

XYZ uses the CAPM to estimate its cost of common equity and estimates that the risk-free rate is 4 percent, the market risk premium is 7 percent, and its tax rate is 35 percent. XYZ estimates that if it had no debt, its "unlevered" beta would be 1.5. a).what would be its WACC at the optimal capital structure? What would the firm's optimal capital structure be?

b). If XYZ's managers anticipate that the company's business risk will increase in the future, what effect would this likely have on the firm's target capital structure?

c). If Congress were to dramatically increase the corporate tax rate, what effect would this likely have on XYZ's target capital structure?

I'm solving with algebra and am confused. I have seen this question in the general population and the answers and methods are different. The answers I calculated were also different from what I read. I started by figuring out Afer-tax cost of debt, then tried to find the betas, then tried to calculate the Cost of Equity using CAPM. Validation using correct algeabraic equations would be a godsend, as well solving these questions