Tax Shields and WACC. River Cruises' management now understands that theory of optimal capital structure implies managers will increase debt as long a of additional interest tax shields exceeds the additional costs of potential fin This trad that the trade- 24. Tax Shields and W the s trade-off gives rise to the hump-shaped curve in Figure 16.7, where the value of maximized at the optimal debt level. What will the curve of WACC as a function e fin ue of the is maximized at the optimal level look like? (LO16-2) a. Start with a no-tax economy. Continue to assume that River Cruises' requined return on assets is 12.5% and return on debt is l0%. In a spreadsheet, calculate Tdebe for debt-equity ratios ranging from 0 to 2.5 in increments of .1. Does WAcen with the DIE ratio? Compare your plot to Figure 16.3. requitys WAC WACC vary b Now assume the corporate tax rate is 35%. Repeat part (a) what happens to WACC DIE increases? What seems to be the optimal capital structure? What considerations are missing that would affect the optimal capital structure implied by part (b)? c. d