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XYZ company faces variable costs of debt and equity depending on the capital structure of the firm as given in table below. (a) Calculate
XYZ company faces variable costs of debt and equity depending on the capital structure of the firm as given in table below. (a) Calculate the weighted average cost of capital (WACC) at each tax rate (from 10% to 70% by increments of 10%) by filling out the table on next page. Make sure to report weighted average cost of capital numbers at 4 decimal places of accuracy such as 12.3456% or 1.0023%. Hint: You can easily do mistakes if you make manual calculations. Instead, you might want to use Microsoft Excel to create a spreadsheet model where you repeatedly keep changing tax rates. (b) What is the minimum weighted average cost of capital at each tax rate? Weighted Average Cost of Capital 10% tax rate 20% 30% tax rate tax rate 40% tax rate 50% tax rate 60% 70% tax rate tax rate (c) What is the optimal capital structure at each tax rate? 10% 20% 30% 40% tax rate tax rate tax rate tax rate 50% tax rate 60% tax rate 70% tax rate Optimal Capital Structure D = % D = % D= % D= % D = % D = % D = % E = % E = % E = % E = % E = % E = % E = % (d) Fill out the blanks: "As the tax rate increases from 10% to 70% the debt ratio (D/V) at the optimal capital structure (increases/decreases/stays the same)." "As the tax rate increases from 10% to 70% the weighted average cost of capital at the optimal capital structure (increases/decreases/stays the same)."
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