FINANCE-Reacher Technology has consulted with investment bankers and determined

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Question # 00128173 Posted By: solutionshere Updated on: 11/02/2015 08:01 AM Due on: 12/02/2015

Subject Business Topic General Business Tutorials:

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							08-12-2012
Chapter:	15
Problem:	12



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 (w_d)	Before-tax Cost Debt (rd)		Input Data
	Risk-free rate	4.5%
	Market risk premium	5.5%
	Unlevered beta	0.8
0%	6.0%		Tax rate		40.0%
10%	6.1%
20%	7.0%
30%	8.0%
40%	10.0%
50%	12.5%
60%	15.5%
70%	18.0%

Fill in formulas in the yellow cells to find the optimum capital structure.

Debt/Value	Equity/Value	Debt/Equity	A-T Cost of	Levered	Cost of
Ratio (w_d)	Ratio (w_s)	Ratio (w_d/w_s)	Debt (r_d)	Beta	Equity	WACC
0%	1.0	0.00
10%	0.9	0.11
20%	0.8	0.25
30%	0.7	0.43
40%	0.6	0.67
50%	0.5	1.00
60%	0.4	1.50
70%	0.3	2.33


		WACC at optimum debt ratio =
		Optimum debt ratio =

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score 3 · Accepted Answer · 11/02/2015 08:01 AM

Solution: FINANCE-Reacher Technology has consulted with investment bankers and determined

Tutorial # 00122607 Posted By: solutionshere Posted on: 11/02/2015 08:01 AM

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the market risk premium, an ...

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