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%.
