Solution
Chapter: 15
Problem: 13
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 (wd) Ratio (ws) Ratio (wd/ws) Debt (rd)Beta Equity WACC
50% 0.5 1.00 7.50% 1.28 11.54% 9.52%
60% 0.4 1.50 9.30% 1.52 12.86% 10.72%
70% 0.3 2.33 10.80% 1.92 15.06% 12.08%
WACC at optimum debt ratio = 8.46%
Optimum debt ratio = 30%
Percent
Financed
with Debt
(wd)
Before-tax
Cost Debt
(rd)
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?
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7/16/2015
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?