Following is the information for a company:- Debt/Assets Ratio Bond Rating After-tax cost of debt WACC 0%
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Question:
Following is the information for a company:-
Debt/Assets Ratio Bond Rating After-tax cost of debt WACC
0% n/a 4.8% 12.00%
10 Aa 4.8 11.64
20 Aa 5.0 11.32
30 A 5.4 11.10
40 Baa 6.0 11.04
50 Ba 7.2 11.40
60 Caa 9.0 12.36
(a) What is the company's optimal capital structure and why?
(b) Use theories of capital structure to explain why Company's WACC would at first decrease and then increase as more debt is used in the capital structure.
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