XYZ, Inc. is currently capitalized with 100% equity that has a current cost of 8.00% and a beta of 1.50. They are considering issuing debt to recapitalize. The firm has talked with an investment bank who estimates that they will be able to issue debt according to the following cost schedule (with no more than 40% debt). XYZ has EBIT of 100 million with a corporate tax rate of 35%. The risk-free rate is 3%. What is the firm's optimal capital structure? What is the WACC at this level, and what is the new firm value?

XYZ, Inc. is currently capitalized with 100% equity that has a current cost of 8.00% and a beta of 1.50. They are considering issuing debt to recapitalize. The firm has talked with an investment bank who estimates that they will be able to issue debt according to the following cost schedule (with no more than 40% debt). XYZ has EBIT of 100 million with a corporate tax rate of 35%. The risk-free rate is 3%. what is the firm's optimal capital structure? What is the WACC at this level, and what is the new firm value? 2 4 Cost of Debt Schedule 96 debt before-tax cost 5.50% 6.00% 6.50% 7.00% Type your answers to the questions above in this text box. You can expand the box as needed to include a brief, but clear, answer (see the insrtuctions on Canvas for more info). 1096 20% 30% 40% 6 9 10 11 EBIT 12 Tax Rate 13 Current Beta 14 Cost of Equity (unlevered) 15 Market risk premium 100 Million 3596 1.50 17 Value of Unlevered Firm Cost of Weight of Debt 0% 10% 20% 30% 40% Beta ul WACC Value of Firm 20 21 23