Question: UB is examining its capital structure with the intent of arriving at an optimal debt ratio. It currently has no debt and has a beta

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:

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)

D/(D + E) (%) Rating Interest Rate (%) 10 10.5 10 20 30 40 50 60 70 80 90 12 13 14 16 18 20

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