Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher's unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm's optimal capital structure and what is the weighted average cost of capital at the optimal structure? Percent Financed with Debt (wa) 0% 5% 10% 15% 20% 30% 35% 40% Before-tax Cost Debt (rd) 6.0% 6.1% 6.3% 6.7% 10.0% 12.5% 15.5% 18.0% 1.0 1.0 0.9 0.9 0.8 0.7 0.7 0.6 Fill in formulas in the yellow cells to find the optimum capital structure. Debt/Value Equity/Value Debt/Equity A-T Cost of Levered Ratio (wa) Ratio (ws) Ratio (wa/ws) Debt (ra) Beta 0% 5% 10% 15% 20% 30% 35% 40% 0.00 0.05 0.11 0.18 0.25 0.43 0.54 0.67 Input Data Risk-free rate Market risk premium Unlevered beta Tax rate WACC at optimum debt ratio Optimum debt ratio 4.5% 5.5% 1.1 25.0% Cost of Equity WACC

Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher's unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm's optimal capital structure and what is the weighted average cost of capital at the optimal structure? Percent Financed with Debt (wa) 0% 5% 10% 15% 20% 30% 35% 40% Before-tax Cost Debt (rd) 6.0% 6.1% 6.3% 6.7% 10.0% 12.5% 15.5% 18.0% 1.0 1.0 0.9 0.9 0.8 0.7 0.7 0.6 Fill in formulas in the yellow cells to find the optimum capital structure. Debt/Value Equity/Value Debt/Equity A-T Cost of Levered Ratio (wa) Ratio (ws) Ratio (wa/ws) Debt (ra) Beta 0% 5% 10% 15% 20% 30% 35% 40% 0.00 0.05 0.11 0.18 0.25 0.43 0.54 0.67 Input Data Risk-free rate Market risk premium Unlevered beta Tax rate WACC at optimum debt ratio Optimum debt ratio 4.5% 5.5% 1.1 25.0% Cost of Equity WACC

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter15: Capital Structure Decisions

Section: Chapter Questions

Problem 12SP

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