Question: Lecompte Learning Solutions is considering making a change to its capital structure in hopes of increasing its value. The company's capital structure consists of debt
Lecompte Learning Solutions is considering making a change to its capital structure in hopes of increasing its value. The company's capital structure consists of debt and common stock. In order to estimate the cost debt, the company has produced the following table: The company uses the CAPM to estimate its cost of common equity, r_s. The risk-free rate is 5% and the market risk premium is 6%. LeCompte estimates that if it had no debt its beta would be 1.0. (Its "unlevered beta, " b_U, equals 1.0.) The company's tax rate, T, is 40%. On the basis of this information, what is the firm's cost of capital at its optimal capital structure? a. Show the calculation of debt equity ratio for scenario B. b. Show the calculation of leveraged beta for scenario B c. Show the calculation of return on equity of the levered company for scenario B. d. Show the calculation of WACC of scenario B. e. What is the optimal capital structure in this case and explain how you make the decision and what is the optimal level of debt vs. equity
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