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Determine the optimal level of debt

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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.

Reference no: EM133122650

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