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)

  • CreatedApril 15, 2015
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