Question
Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown in the following table. Data
Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown in the following table. Data for the risk-free rate, the market risk premium, an estimate of Reachers unlevered beta, and the tax rate are also shown. Based on this information, what is the firms optimal capital structure, and what is the weighted average cost of capital at the optimal structure
Percent Financed with Debt (wd) Before-Tax Cost Debt (rd) Input Data 0% 6.0% Risk-free rate 4.5% 10 6.1 Market risk premium 5.5% 20 7.0 Unlevered beta 0.8 30 8.0 Tax rate 40.0% 40 10.0 50 12.5 60 15.5 70 18.0
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