Aaron athletics is trying to determine its optimal capital

Assignment Help Corporate Finance

Reference no: EM13380709

Aaron Athletics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table:

Percent financed with debt (Wd)	Percent financed with equity (Ws)	Debt to Equity (D/S)	Bond Rating	Before-tax cost of debt (BT Rd)
10%	90%	.11	AA	4.0%
20%	80%	.25	A	5.0%
40%	60%	.67	BB	6.0%
50%	50%	1.0	B	7.0%

The company's tax rate, T, is 40 percent. The company uses the CAPM to estimate its cost of common equity, Rs. The risk-free rate is 1 percent and the market risk premium is 6 percent. Aaron estimates that if it had no debt its beta would be 1.0. (i.e., its "unlevered beta," bU, equals 1.0.)

On the basis of this information, what is the company's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure?

Reference no: EM13380709

Questions Cloud

Your local travel agent is advertising an upscale winter : your local travel agent is advertising an upscale winter vacation package for travel three years from now to

Sam strother and shawna tibbs are senior vice presidents of : sam strother and shawna tibbs are senior vice presidents of mutual of seattle. they are co-directors of the companys

Working capital managementthe chickman corporation has an : working capital managementthe chickman corporation has an inventory conversion period of 60 days a receivables

A firm has the following balance : a firm has the following balance sheetnbspnbspnbspnbspnbspnbspnbspnbspnbspnbspnbsp cash

Aaron athletics is trying to determine its optimal capital : aaron athletics is trying to determine its optimal capital structure. the companys capital structure consists of debt

Its time to decide how to use the money your firm is : its time to decide how to use the money your firm is expected to make this year.nbsp two investment opportunities are

You are provided the following information on a company the : you are provided the following information on a company. the total market value is 40 million. the companys capital

1reynolds textiles wants to measure its cost of common : 1.reynolds textiles wants to measure its cost of common equity. the firms stock is currently selling for 57.50 per

1 liquidity ratios edison stagg and thornton have the : 1. liquidity ratios. edison stagg and thornton have the following financial information at the close of business on

User Account

All Pages