ACB Inc. 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 1.3. The T-bill rate is 8% and the T-Bond rate is 9.5%. Your research indicates that the debt rating will be as follows at different debt levels:

D/(D+E)

Rating

Interest rate

0%

AAA

10%

10%

AA

10.5%

20%

A

11%

30%

BBB

12%

40%

BB

13%

50%

B

14%

60%

CCC

16%

70%

CC

18%

80%

C

20%

90%

D

25%

The firm currently has 2 million shares outstanding at $30 per share, and the tax rate is 40%.

What is the firms optimal debt ratio?

Assuming that the firm restructures and purchases stock with debt, what will the value of

the stock be after the restructuring?