Find the optimal capital structure

Reference no: EM132208228

Question - ABC Industries wants 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:

% Finance with Debt Wd	% Finance With Equity Wc	Before Tax Cost of Debt at Different Levels
10	90	7.0
20	80	7.2
50	50	9.6

The company's tax rate, T, is 30 percent.

The cost of equity is calculated by using the CAPM model. The risk free rate is 4% while the return on market is 10%. The company uses the CAPM to estimate its cost of common equity, rs. The beta of the unlevered Boston Industries is 1.

Find the Optimal capital structure and the cost of equity on the same optimal capital structure?

Reference no: EM132208228

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