Question: UB is examining its capital structure with the intent of

UB is examining its capital structure with the intent of arriving at an optimal debt ratio. It currently has no debt and has a beta of 1.5. The riskless interest rate is 9%.
Your research indicates that the debt rating will be as follows at different debt levels:
The firm currently has 1 million shares outstanding at $20 per share (tax rate = 40%).
a. What is the firm’s optimal debt ratio?
b. Assuming that the firm restructures by repurchasing stock with debt, what will the value of the stock be after the restructuring? (with 5% growth in perpetuity)

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  • CreatedApril 15, 2015
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