Unlever Limited currently has no debt. Jet Li, VP - Finance would like to determine the optimal
capital structure. The following data are relevant for the analysis.
EBIT is expected to be $4,000,000 per year for the next 10 years and after that it will
decline at 2% per year forever.
Present value of bankruptcy related costs = $10 million
Tc = 40%, rb = 6%, and ro = 10%
Probabilities of bankruptcy at different debt levels are as follows: 

Debt Level (in millions of dollars) $0  $5  $10  $15  $20  $25  $30
Probability of bankruptcy (%).        0    0     2      8     16     40    64
a. Determine the optimal level of debt.

b. Determine the weighted average cost of capital at the optimal debt level.

 

Answer rating: 100% (QA)

a To determine the optimal level of debt for Unlever Limited we need to find the debt level that mi... View the full answer