Unlever Limited currently has no debt. Jet Li, VP - Finance would like to determine the optimal
Question:
Unlever Limited currently has no debt. Jet Li, VP - Finance would like to determine the optimal
capital structure. The following data are relevant for the analysis.
EBIT is expected to be $4,000,000 per year for the next 10 years and after that it will
decline at 2% per year forever.
Present value of bankruptcy related costs = $10 million
Tc = 40%, rb = 6%, and ro = 10%
Probabilities of bankruptcy at different debt levels are as follows:
Debt Level (in millions of dollars) $0 $5 $10 $15 $20 $25 $30
Probability of bankruptcy (%). 0 0 2 8 16 40 64
a. Determine the optimal level of debt.
b. Determine the weighted average cost of capital at the optimal debt level.
Fundamentals of Financial Management
ISBN: 978-0324664553
Concise 6th Edition
Authors: Eugene F. Brigham, Joel F. Houston