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Lilit [14]
2 years ago
12

WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently ha

s no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield. Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows: Market Debt- to-Value Ratio (wd) Market Equity-to-Value Ratio (ws) Market Debt- to-Equity Ratio (D/S) Before-Tax Cost of Debt (rd) 0.0 1.0 0.00 6.0% 0.2 0.8 0.25 7.0 0.4 0.6 0.67* 8.0 0.6 0.4 1.50 9.0 0.8 0.2 4.00 10.0 * Use the exact value of 2/3 in your calculations. F. Pierce uses the CAPM to estimate its cost of common equity, rs and at the time of the analaysis the risk-free rate is 7%, the market risk premium is 6%, and the company's tax rate is 40%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 1.2. Based on this information, what is the firm's optimal capital structure, and what would be the weighted average cost of capital at the optimal capital structure? Do not round intermediate calculations. Round your answers to two decimal places. Debt: % Equity: % WACC: %
Business
1 answer:
den301095 [7]2 years ago
5 0

Answer:

The firm's optimal capital structure is 80% Debt and 20% Equity.

The WACC at this optimal capital structure is 10.28%.

Explanation:

Note: See the attached excel file the computation of the weighted average cost of capital (WACC) at the optimal capital structure. Also note that the data in the question are merged together but they are sorted in the attached excel file before answering the question.

The optimal capital structure of a firm can be described as a combination of debt and equity financing that is the beat in which market value of the firm is maximized while its cost of capital is minimized.

Using the weighted average cost of capital (WACC), the optimal capital cost capital structure occurs at a point where the WACC is the lowest.

From the attached excel file, the lowest WACC is 0.1028, or 10.28%.  At this firm Market Debt- to-Value Ratio (wd) which is debt is 0.80 (i.e. 80%), and Market Equity-to-Value Ratio (ws) which is equity is 0.20 (i.e. 20%).

Therefore, the firm's optimal capital structure is 80% Debt and 20% Equity.

The WACC at this optimal capital structure is 10.28%.

Download xlsx
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3 years ago
Bank A offers to lend you money at 10 percent compounded monthly, Bank B at 11 percent compounded quarterly, and Bank C at 12 pe
ahrayia [7]

Answer and Explanation:

The computation is given below:

For Bank A,

Effective annual rate is

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For Bank B,

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2 years ago
Magnira Corp. is an apparel company. After a slow start, it saw a steep rise in its clientele and a remarkable increase in its p
Ierofanga [76]

Answer:

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Explanation:

Ofcourse having a brand recognition means that the company is oriented towards developing its image that plays a vital role in making choices and this is only possible if its products are widely available in the market by openning new branches and offering other branches to present your products. This will lead to access of product to greater amount of public and greater the number of people will choose Magnira's products.

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Morris company applies overhead based on direct labor costs. For the current year, morris company estimated total overhead costs
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Answer:

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Explanation:

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Therefore I think the answer is Sustainability
Hope it helps
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2 years ago
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