Problem 3: Reacher Solutions is considering 3 different capital structures. To help them make the optimal choice, they provided you with the following data: the risk-free rate (rf) is currently 3.5%, the market risk-premium (rpm, that is rm -rf) is 7%, its unlevered beta (bu) is 1.3, and its tax rate is 25%. Percent Financed with Debt (w.) 0% Input Data Risk-free rate Market risk premium Unlevered beta Tax rate 3.5% 7.0% 1.3 25.0% 5% 10% 15% 20% 25% 30% Before-tax Cost Debt (rd) 6.5% 6.7% 7.6% 10.0% 12.0% 14.4% 20.0% a) Help Reacher fill out the following table. Levered Beta Cost of Equity WACC Debt/Value Ratio (wa) 0% 5% 10% 25% 20% 25% 30% Equity/Value DE ratio A-T Cost of Ratio (w.) (ww.) Debt (ra) 100% 0.00 95% 0.05 90% 0.11 75% 0.33 80% 0.25 75% 0.33 70% 0.43 b) Based on your computations and answers in the table, what is the optimal capital structure? What is the optimum WACC? WACC at optimum debt ratio Optimum debt ratio = c) If you were to change your capital structure from 100% equity to the optimal debt/equity mix, what would you do? Would your total assets increase? Problem 3: Reacher Solutions is considering 3 different capital structures. To help them make the optimal choice, they provided you with the following data: the risk-free rate (rf) is currently 3.5%, the market risk-premium (rpm, that is rm -rf) is 7%, its unlevered beta (bu) is 1.3, and its tax rate is 25%. Percent Financed with Debt (w.) 0% Input Data Risk-free rate Market risk premium Unlevered beta Tax rate 3.5% 7.0% 1.3 25.0% 5% 10% 15% 20% 25% 30% Before-tax Cost Debt (rd) 6.5% 6.7% 7.6% 10.0% 12.0% 14.4% 20.0% a) Help Reacher fill out the following table. Levered Beta Cost of Equity WACC Debt/Value Ratio (wa) 0% 5% 10% 25% 20% 25% 30% Equity/Value DE ratio A-T Cost of Ratio (w.) (ww.) Debt (ra) 100% 0.00 95% 0.05 90% 0.11 75% 0.33 80% 0.25 75% 0.33 70% 0.43 b) Based on your computations and answers in the table, what is the optimal capital structure? What is the optimum WACC? WACC at optimum debt ratio Optimum debt ratio = c) If you were to change your capital structure from 100% equity to the optimal debt/equity mix, what would you do? Would your total assets increase