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WACC and Optimal Capital Structure: using CAPm to estimate cost of common equity and estimates of risk-free rate is 4%, market risk premium is 7%,
WACC and Optimal Capital Structure: using CAPm to estimate cost of common equity and estimates of risk-free rate is 4%, market risk premium is 7%, and tax rate is 35%. The company estimates that if it had no debt, its "unlevered" beta would be 1.5. What would be the WACC at the optimal capital structure? What would be the firm's optimal capital structure be? Please show calculations.
Debt-to-Capital Ratio | Equity-to-Capital Ratio | Debt-to-Equity Ratio | Bond Rating | Before-Tax Cost of Debt |
(wd) | (we) | (D/E) | (rd) | ((rd(1-T)) |
0.0 | 1.0 | 0.00 | A | 6.0% |
0.2 | 0.8 | 0.25 | BBB | 7.0% |
0.4 | 0.6 | 0.67 | BBB | 9.0% |
0.6 | 0.4 | 1.50 | C | 11.0% |
0.8 | 0.2 | 4.00 | D | 14.0% |
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