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B D E G H Pc Ltd Learning Solutions is considering making a change to...

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B D E G H Pc Ltd Learning Solutions is considering making a change to its capital structure in hopes of increasing its value. 2. The company's capital structure consists of debt and common stock. 3 In order to estimate the cost of debt, the company has produced the following table 4 5 % of Debt (wd) % of equity (we) Bond Ratir Before Tax cost of debt 6 0.1 0.9 AAA 7.00% 7 0.2 0.8 AA 7.20% 8 0.3 0.7 A 8.00% 9 0.4 0.6 BBB 8.80% 10 0.5 0.5 BB 9.60% 11 12 The company uses the CAPM to estimate its cost of common equity 13 The risk-free rate is 5% and the market risk premium is 6%. 14 Pc Ltd estimates that if it had no debt its beta would be 1.0. (Its "unlevered beta,") 15 The company's tax rate, T, is 40%. 16 On the basis of this information, what is Pc Ltd's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure? 17 18

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