Is this correct? Problem 3: Reacher Solutions is considering 3 different capital structures. To...
60.1K
Verified Solution
Link Copied!
Question
Finance
Is this correct?
Problem 3: Reacher Solutions is considering 3 different capital structures. To help them make the optimal choice, they provided you with the following data: the risk-free rate (rf) is currently 4.2%, the market risk-premium (rpm, that is rm -r) is 7.0%, its unlevered beta (bu) is 1.3, and its tax rate is 25%. Input Data Risk-free rate Market risk premium Unlevered beta Tax rate 4.2% 7.0% 1.3 25.0% Percent Financed with Before-tax Cost Debt Debt (w.) (rd) 0% 6.5% 5% 6.7% 10% 7.6% 15% 10.0% 20% 12.0% 25% 14.4% 30% 20.0% a) Help Reacher fill out the following table. (8 pts) Levered WACC Debt/Value Ratio (wa) 0% 5% 10% 25% 20% 25% 30% EquityValue Ratio (w.) 100% 95% 90% 75% 80% 75% 70% DE ratio (w/w) 0.00 0.05 0.11 0.33 0.25 0.33 0.43 A-T Cost of Debt (ra) 4.88% 5.00% 5.70% 7.50% 9.00% 10.80% 15.00% Beta 1.30 1.35 1.41 1.63 1.54 1.63 1.72 Cost of Equity 13.30% 13.66% 14.06% 15.58% 15.01% 15.58% 16.23% 13.30% 13.24% 13.76% 20.01% 17.01% 20.01% 24.21% b) Based on your computations and answers in the table, what is the optimal capital structure? What is the optimum WACC? (2 pts) WACC at optimum debt ratio Optimum debt ratio = 13.24% 5%
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
