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Determine the optimum capital structure for cluster ltd

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Question - Cluster Ltd, a very profitable company, is considering increasing its business activities in the new financial year. Its directors have asked you to advise it on the ideal capital structure for the company. You estimate that the market relationship between debt (after tax) and equity for companies similar to Cluster Ltd is:

Debt

Equity

kd%

ke%

0

100

0

22

20

80

12,5

23,125

40

60

12,5

25

50

50

16

28

40

40

19

34

Required -

1. Determine the optimum capital structure for Cluster Ltd.

2. Discuss the problems that are encountered in the estimation of a company's WACC when bank overdraft or convertible long-term loans are used as sources of long-term finance.

3. Outline the fundamental assumptions that are made whenever the WACC of a company is used as the discount rate in NPV calculations.

Reference no: EM133147544

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