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FIN 302 Intermediate Financial Management Problem Set 5 1. UB 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 1.5. The riskless interest rate is 9%. Your search indicates that debt rating will be as follows at different debt levels: Interest D/D+E Rating Rate 0% AAA 10% 10% AAA 10.50% 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 1 million shares outstanding at $20 per share(tax rate = 40%) Market Risk premium is 5.5% a) What is the firm's cost of Equity at different debt levels. b) What is the firm's after-tax cost of debt at different debt levels. c) Estimate the optimal debt ratio using the cost of capital approach