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TEL Shahrin Den Extra Credit 2: (R) = R + B ((R)-R Market Risk Premium = Rm - Rrf WACC = w R+R (1-Tx) +
TEL Shahrin Den Extra Credit 2: (R) = R + B ((R)-R Market Risk Premium = Rm - Rrf WACC = w R+R (1-Tx) + WAR cscs ACME is trying to determine its optimal capital structure. ACME's capital structure consists of debt and common stock. In order to estimate the cost of capital, the company has produced the following table: Capital Structure 1 Beta 1.066 1.15 1.258 1.402 1.6 2 3 Before tax cost of debt 7.00% 7.2 8 8.8 9.6 Weight of Weight Bond Debt of Equity D/E Rating 0.1 0.9 0.11 AAA 0.2 0.8 0.25AA 0.3 0.7 0.43 A 0.4 0.6 0.67 BBB 0.5 0.5 1 BB 4 5 ACME's tax bracket is 40%. stder.o6 The company uses the CAPM to estimate its cost of equity. The risk-free rate is 5% and the market risk premium is 6%. On the basis of this information, what is the company's optimal capital structure, what is the firm's WACC at this optimal capital structure, and what is the value of the company if it has free cash flows of $1million every year? Please complete the table below. Capital Cost of Structure Equity Value of the firm WACC 1.167 2 3 4 5 0 Re= 2,05 +1.066(6.06) +.05) R.16726 WACC=
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