What is the company optimal capital structure and why

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Reference no: EM13298258

The company's capital structure consists of debt and common stock. In order to estimate the appropriate cost of debt, use the following

% financed with debt Bond rating Before-tax cost of debt
20 AA 7.0%
40 A 8.4%
50 BBB 9.3%

The risk-free rate is 5% and the market risk premium is 6%. ABC estimates that if it had no debt its volatility would be the same as the stock market's as a whole. The company's tax rate is 40%. What is the company's optimal capital structure and why?

Reference no: EM13298258

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