Solution-Determine optimal capital structure

Determine optimal capital structure

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Reference no: EM133111448

Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different debt levels, the company's treasury staff has consulted with investment bankers and, based on those discussions, has created the following table:

% debt financed	% equity financed	D/E Ratio (D/E)	Bond Rating	Before-tax cost of debt (r_d)
0.00	1.00	0.00	A	7.0%
0.20	0.80	0.25	BBB	8.0%
0.40	0.60	0.67	BB	10.0%
0.60	0.40	1.5	C	12.0%
0.80	0.20	4.0	D	15.0%

Elliott uses the CAPM to estimate its cost of common stock, r_s. The company estimates that the risk-free rate is 5%, the market risk premium is 6% and its tax rate is 25%. Elliott currently has 20% debt and a beta of 1.425. Based on this information, what is the firm's optimal capital structure?

Reference no: EM133111448

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Determine optimal capital structure

Reference no: EM133111448

Reference no: EM133111448

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