Kido Corp. currently has 35 million common stocks each trading at $24. Moreover, it has 1 million, 2.947%

coupon, 10 year bonds ($1000 par) each trading at 84. Interest is paid annually. The management wants to

change the firms capital structure by either changing the debt-to-equity ratio to:

(i) 0.43 by selling more stocks and paying off debt or

(ii) 2.33 by issuing more debt and do stock repurchase

More Information:

Current beta is 1.5

The risk free rate is 2.5%

Market risk premium is 10%.

Corporate tax rate is 40%.

The current cost of debt (before tax) is 5%.

If the debt-to-equity ratio changes to 0.43, the cost of debt (before tax) will be 3%.

If the debt-to-equity ratio is 2.33, the cost of debt (before tax) will be 8%.

Find the following:

a) What is the firms WACC at current debt-to-equity ratio?

b) What is the firms WACC using debt-to-equity ratio of 0.43?

c) What is the firms WACC using debt-to-equity ratio of 2.33?

d) What is the optimal capital structure and why?