However, CEO of Mill Export Co. is worried about the impact on stock price due to...

 

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However, CEO of Mill Export Co. is worried about the impact on stock price due to an increase in debt ratio. As a financial analyst, you are asked to conduct a thorough analysis to recommend an appropriate capital structure for the company. At present, there are 100,000 shares outstanding, at $10/per share trading price. Current, the equity beta of the company is 1.82.The T-Bond has a rate of 5.0% and the market risk premium is estimated to be 5.5%. The current outstanding long-term debt of $500,000 is rated at AAA with before-tax cost of debt 6.5%. The company is placed in the 40% tax bracket. Three proposals are under consideration. (Each proposal 's additional debt is individually compared to current debt level of $500,000) Proposal A-issues addition $500,000 debt with before-tax Rd: 7% Proposal B-issues addition $1,000,000 debt with before-tax Rd: 7.5% Proposal C-issues additional $1,500,000 debt with before-tax Rd:8.8% Given the above Information, what is the optimal capital structure of Mill Export Co.? You must demonstrate all the calculation steps then record the answer in the table below. Debt weights Beta WACC Current Proposal A Proposal B Proposal C However, CEO of Mill Export Co. is worried about the impact on stock price due to an increase in debt ratio. As a financial analyst, you are asked to conduct a thorough analysis to recommend an appropriate capital structure for the company. At present, there are 100,000 shares outstanding, at $10/per share trading price. Current, the equity beta of the company is 1.82.The T-Bond has a rate of 5.0% and the market risk premium is estimated to be 5.5%. The current outstanding long-term debt of $500,000 is rated at AAA with before-tax cost of debt 6.5%. The company is placed in the 40% tax bracket. Three proposals are under consideration. (Each proposal 's additional debt is individually compared to current debt level of $500,000) Proposal A-issues addition $500,000 debt with before-tax Rd: 7% Proposal B-issues addition $1,000,000 debt with before-tax Rd: 7.5% Proposal C-issues additional $1,500,000 debt with before-tax Rd:8.8% Given the above Information, what is the optimal capital structure of Mill Export Co.? You must demonstrate all the calculation steps then record the answer in the table below. Debt weights Beta WACC Current Proposal A Proposal B Proposal C

Answer rating: 100% (QA)

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