UB Inc is examining its capital structure to arrive at an optimal debt ratio. It currently has
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Question:
UB Inc is examining its capital structure to arrive at an optimal debt ratio. It currently has no debt, 1 mn shares outstanding at $20 per share, equity beta of 1.5, and tax rate of 40%. Risk free rate is 9% and your research indicates the following credit rating at different debt levels. (a) What is the firm's optimal debt ratio? (b) Assuming the firm restructures by issuing debt and repurchasing shares, what will be the value of shares?
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