-If the Beta coefficient and the required rate of return on common equity is not increasing constantly as the amount of debt in the structure moves from 0% to increasing levels of debt, something is wrong.

• If the cost of debt does not fall and then begin to increase as the risks of bankruptcy increase, something is wrong.
• If the WACC curve does not display some type of U-shaped form (Note: You may have to make the vertical percentage cost scale have very small increments to show this.), something is wrong.

For your target WACC, you will have determined what today's cost of debt is for your company (usually, from existing corporate balance sheets or annual reports, or both). Now, for lower or higher amounts of debt, you have to (somehow) determine the costs of debt as the debt/equity ratio is changed. The textbook (Table 15-5, p. 610) illustrates this process for you. Rather than each team having to spend a lot of time visiting/calling bankers, we will use the following as "givens" for you:

oFor each decrement or increment of 10% from your target ratio of debt and the corresponding debt costs, the debt costs decrease/increase by 10% from the target.

oFor each decrement or increment of 20% from your target ratio of debt and the corresponding debt costs, the debt costs decrease/increase by 25% from the target.

For each decrement or increment of 40% from your target ratio of debt and the corresponding debt costs, the debt costs decrease/increase by 60% from the target.