Lily co. is currently capitalized with 100% equity that has a current cost of 9.10% and a beta of 1.50. they are considering issuing debt to recapitalize. the firm has talked with an investment bank who estimates that they will be able to issue debt according to the following cost schedule (with no more than 40% debt). XYZ has EBIT of 100 million with a corporate tax rate of 35%. The risk free rate is 3%. what is the firms optimal capital structure? what is the WACC at this level, what is the new firm value?

Cost of Debt Schedule % debt before-tax cost 10% 20% 30% 40% 5.50% 6.00% 6.50% 7.00% EBIT Tax Rate Current Beta Cost of Equity (unlevered) Market risk premium Value of Unlevered Firm Cost of Weight of Debt 0% 10% 20% 30% 40% Beta Equity WACC Value of Firm