UB is examining its capital structure with the intent of arriving at an optimal debt ratio. It

Question:

UB is examining its 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 research indicates that the debt rating will be as follows at different debt levels:

UB is examining its capital structure with the intent of

The firm currently has 1 million shares outstanding at $20 per share (tax rate = 40%).
a. What is the firm€™s optimal debt ratio?
b. Assuming that the firm restructures by repurchasing stock with debt, what will the value of the stock be after the restructuring? (with 5% growth in perpetuity)

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...