Question
I'm not sure how to find the Beta, that is all I want? You are the CFO of a company who is trying to figure
I'm not sure how to find the Beta, that is all I want?
You are the CFO of a company who is trying to figure out what is the most optimum capital structure of your company. You assign the new interns the task to recommend optimum capital structure. You know that your current Debt to Equity Ratio of 1/9 is too small. You know that taking on more debt is beneficial because it reduces your tax liability but you want to know what Debt to Total Assets ratio will maximizes the firm value. You understand from your Treasurer that for every 10% increase in the debt to total assets ratio, your debt rate which currently is at 6.5% will move by 0.10%. Your interns tells you about delevering and relevering debt to find levered beta that they learnt in Fina 4330 class at the University of Houston. You ask them to submit a spread sheet showing various scenarios of debt/total assets. You also want to see how your debt rate and required rate of return on the equity changes. You want to see WACC in each scenario and also want to see the firm value. This information will show you at what Debt/Equity ratio would your firm will have the maximum value. You ask them to present this spread sheet no later than November 18, 2019 so that you can be prepared for the presentation to the Board of Directors.
Debt Weight | 10% | 20% | 30% | 40% | 50% | 60% | 70% | 80% | RF | 3% | |
Debt/Equity Ratio | 0.11 | 0.25 | 0.43 | 0.67 | 1.00 | 1.50 | 2.33 | 4.00 | Initial Rd | 6.50% | |
Debt/Asset Ratio | 0.1 | 0.2 | 0.3 | 0.4 | 0.5 | 0.6 | 0.7 | 0.8 | incremental Rd | 0.10% | |
Debt Rate | 6.5% | 6.6% | 6.7% | 6.8% | 6.9% | 7.0% | 7.1% | 7.2% | RM-RF | 5% | |
Unlevered Beta | Tax Rate | 40% | |||||||||
Levered Beta | FCF | 20 | |||||||||
Equity Rate | |||||||||||
WACC | |||||||||||
Change in WACC | |||||||||||
Firm Value |
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