Maximizing Firm Value: A Realistic Example The Ricardo-Trans Am Corporation has currently no debt in its...

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Maximizing Firm Value: A Realistic Example The Ricardo-Trans Am Corporation has currently no debt in its capital structure. Its Beta is 1. The risk free rate is 6 percent and the market risk premium is 7 percent Bank Balino is willing to lend the company capital so it can change its capital structure. However, the bank is concerned about the company taking on too much debt, so it is offering the following interest rate: D RD = RF +2% E What is the capital structure (D/E) that maximizes firm value? What is the new cost of equity? What is the new WACC? 48 Maximizing Firm Value: A Realistic Example The Ricardo-Trans Am Corporation has currently no debt in its capital structure. Its Beta is 1. The risk free rate is 6 percent and the market risk premium is 7 percent Bank Balino is willing to lend the company capital so it can change its capital structure. However, the bank is concerned about the company taking on too much debt, so it is offering the following interest rate: D RD = RF +2% E What is the capital structure (D/E) that maximizes firm value? What is the new cost of equity? What is the new WACC? 48

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To determine the capital structure DE that maximizes firm value we need to find the optimal balance ... View the full answer