OPTIMAL CAPITAL STRUCTURE

Assume that you have just been hired as business manager STS. The Cost of Debt of STS with Different Capital Structures is shown in the table below

Percent Financed with Debt (wd)	Cost of Debt (rd)
0%	8.0%
10%	8.0%
20%	8.1%
30%	8.5%
40%	9.0%
50%	11.0%
60%	14.0%

The risk-free rate of return, rRF, is 6%, and the market risk premium, MRP, is 6%. Calculate the optimum capital Structure of STS. If we assume that the unlevered Beta of STS =1, calculate the cost of capital corresponding to recapitalization with the different debt levels above.

Input	Value
Unlevered Beta of STS	1
Risk-free rate (rRF)	6%
Market risk premium (MRP)	6%
Expected EBIT	$40,000
Tax rate	40%
outstanding shares	10,000

STS has an expected EBIT of $40,000. It pays all its income in dividends.

• Estimate the firms value for each debt level.
• Also find the stock price for each debt level and EPS at each level.

Present all your answers in a fully formulated Excel sheet with input and output sections. All calculations should be linked.