Mrs. Lovett's Meat Pies Inc. has consulted with investment bankers and determined the interest rate it...
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Mrs. Lovett's Meat Pies Inc. has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Mrs. Lovett's unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm's optimal capital structure and what is the weighted average cost of capital at the optimal structure? Debt (rd) Percent Financed with Before-tax Cost Debt (W) Input Data Risk-free rate 4.5% 0% 6.0% Market risk premium Unlevered beta Tax rate 6.5% 0.7 40.0% 10% 6.5% 20% 7.0% 30% 8.5% 40% 10.0% 50% 12.5% 60% 15.5% 70% 18.0% Fill in formulas in the yellow cells to find the optimum capital structure. Debt/Value Equity/Value Debt/Equity A-T Cost of Ratio (wa) Ratio (w) Ratio (w/w) Debt (ra) 0% 1.0 0.00 10% 0.9 0.11 20% 0.8 0.25 30% 0.7 0.43 40% 0.6 0.67 50% 0.5 1.00 60% 0.4 1.50 70% 0.3 2.33 WACC at optimum debt ratio = Optimum debt ratio Levered Cost of Beta Equity WACC Mrs. Lovett's Meat Pies Inc. has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Mrs. Lovett's unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm's optimal capital structure and what is the weighted average cost of capital at the optimal structure? Debt (rd) Percent Financed with Before-tax Cost Debt (W) Input Data Risk-free rate 4.5% 0% 6.0% Market risk premium Unlevered beta Tax rate 6.5% 0.7 40.0% 10% 6.5% 20% 7.0% 30% 8.5% 40% 10.0% 50% 12.5% 60% 15.5% 70% 18.0% Fill in formulas in the yellow cells to find the optimum capital structure. Debt/Value Equity/Value Debt/Equity A-T Cost of Ratio (wa) Ratio (w) Ratio (w/w) Debt (ra) 0% 1.0 0.00 10% 0.9 0.11 20% 0.8 0.25 30% 0.7 0.43 40% 0.6 0.67 50% 0.5 1.00 60% 0.4 1.50 70% 0.3 2.33 WACC at optimum debt ratio = Optimum debt ratio Levered Cost of Beta Equity WACC
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