Suppose General Electric currently has a market debt value of $$22,940$ million, $908$ million common stock shares outstanding at a price of $$152\mathrm{.}94$ per share. The company's current EBIT is $$7880$ million with a marginal tax rate of $15\%.$ Its levered beta is $1\mathrm{.}24,$ and its current cost of equity is $9\mathrm{.}4\%.$ The current Treasury bond rate is $5\mathrm{.}5\%.$

The company is considering the optimality of their capital structure. Based on their calculations, here are the default spread across different debt ratios:

Debt Ratio Bond Rating Default spread

$0\%$ AAA $0\mathrm{.}300\%$

$10\%$ AAA $0\mathrm{.}300\%$

$20\%$ A$+1\mathrm{.}000\%$

$30\%$ A $1\mathrm{.}250\%$

$40\%$ A$-1\mathrm{.}500\%$

$50\%$ BB $2\mathrm{.}500\%$

$60\%$ BB $2\mathrm{.}500\%$

$70\%$ B $4\mathrm{.}000\%$

$80\%$ B$-5\mathrm{.}000\%$

$90\%$ CCC $6\mathrm{.}000\%$

a$)$ Assume their EBIT won't change across the levels of debt, what is the optimal debt$/$equity ratio for General Electric?

b$)$ What would GE need to do to achieve this optimal capital structure?

c$)$ What is the WACC at the optimal capital structure?

a$.$

a$)10\%$; b$)$ Reduce its debt level; c$)9\mathrm{.}24\%$

b$.$

a$)25\%$; b$)$ Increase its debt level; c$)8\mathrm{.}82\%$

c$.$

a$)20\%$; b$)$ Increase its debt level; c$)9\mathrm{.}65\%$

d$.$

a$)11\%$; b$)$ Reduce its debt level; c$)8\mathrm{.}81\%$