A company wants to know what its optimal capital structure is. This company currently has the following
Question:
A company wants to know what its optimal capital structure is.
This company currently has the following information:
The Capital Asset Pricing is 17.6625%
It has a solvency ratio (D/A) of 0.6
The risk-free rate is 4.25%
The market return rate is 13.50%
A market risk premium of 9.25%
Generates an EBIT of $85,000
It has 250,000 shares outstanding.
Its operations have a financing cost of 11.28895%
Your tax rate is 30%
The interest rate on the debt if it were not leveraged would be 5% initially and for every 10% of debt you add to your capital structure, the rate will increase by 15% more.
DETERMINE:
What is the optimal capital structure? Support your answer.
Graphically demonstrate why this is the optimal capital structure.
Calculate the price of the Share with the Gordon model.
Management Science The Art of Modeling with Spreadsheets
ISBN: 978-1118582695
4th edition
Authors: Stephen G. Powell, Kenneth R. Baker