Question
Mirage Company has 30% debt and 70% equity in its capital structure.Its beta is 1.2.The risk-free rate of return is 3% and the market rate
Mirage Company has 30% debt and 70% equity in its capital structure.Its beta is 1.2.The risk-free rate of return is 3% and the market rate of return is 10%.Its tax rate is 40%.It is contemplating whether to increase its debt level to 40% or 50% or keep it at 30%. The table below shows its cost of debt at different capital structure levels.
Debt/Asset Cost of debt, rd % Beta Cost of equity, rs % WACC
0.30 current81.2
0.4010
0.5012
Complete the table and state which of the three debt levels is the best. (Hint: first calculate unlevered beta).
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