Question

Pierce uses the CAPM to estimate its cost of common equity, rs and at the time of the analaysis the risk-free rate is 5%, the market risk premium is 6%, and the company's tax rate is 35%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.8. 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.

Problem 15-11 WACC and Optimal Capital Structure F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has 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- Market Equity- Market Debt- to-Value to-Value to-Equity Ratio (wa) Ratio (w) Ratio (D/S) Before- Tax Cost of Debt (ra) 0.00 7.0% 0.25 8.0 0.67 10.0 1.50 12.0 0.2 4.00 15.0 F. Pierce uses the CAPM to estimate its cost of common equity, r's and at the time of the analaysis the risk-free rate is 5%, the market risk premium is 6%, and the company's tax rate is 35%. F. Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.8. 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

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ke - Microsoft Excel (Product Activation Failed) Page Layout Formulas File Home Insert Data Review View Add-Ins Z AutoSum Cut AC Wrap Text General Calibri 11 E Copy Fill Merge & Center Insert Delete Format Paste B I U 000 Conditional Format Cell Sort & Find & % Format Painter Clear Filter Select Formatting as Table Styles Clipboard Font Alignment Number Styles Cells Editing fox VP123 VWA VM VJ VK VL VN VO VP VQ VR VS VT VU 104 WE HAVE TO CALCULATE LEVERED BETA FOR EACH DEBT LEVEL Rf = 5% 105 Rm -Rf 6% 106 107 100%- Wd ke 5%beta (6%) 108 ke Rf beta (Rm-Rf) D/S kd (AFTER TAX) Wd LEVERED BETA WACC= Wd*kd + Ws*ke 109 Ws 0.0000 7%(1-0.35) 4.55% 0.8* (1(1-0.35)(0.0000)) = 5.20% 0.8* (1 (1-0.35) (0.2500)) = 6.50% 0.8* (1 (1-0.35)(0.6667)) = 7.80% 0.8* (1(1-0.35)(1.5000)) = 9.75% 0.8* (1 (1-0.35)(4.0000)) = 0% 100% 9.80% 110 0.8000 9.80% 0.2500 8%(1-0.35) = 9.50% 20% 80% 0.9300 10.58% 111 0.6667 10%(1-0.35) 1.5000 12%(1-0.35) 4.0000 15%(1-0.35) 40% 60% 11.88% 9.73% 112 1.1467 60% 40% 1.5800 14.48% 10.47% 113 12.26% 80% 20% 2.8800 22.28% 114 115 116 AT OPTIMAL CAPITAL STRUCTURE, Wd 0.2 (20%) & Ws 0.8 (80%) 117 ANSWER 9.50% 118 WACC AT OPTIMAL LEVEL 119 DEBT 20% 120 80% 121 EQUITY 9.50% 122 WACC 123 124 RI DGM beta LEASING PV, FV, ANNUITY DIR right YIELD bond portfolio clean КЕ САРМ UTILITY, SHARPE, beta SANDRINE coNvexity port future INDEX INTL CAP BUD WACC Rea erences: CF670 (- 120% WA 03:21 & ENG all 03-12-2019