What is the firms optimal debt ratio

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Reference no: EM13933368

ACB Inc. is examining its capital structure with the intent of arriving at an optimal debt ratio. It currently has no debt and has a beta of 1.3. The T-bill rate is 8% and the T-Bond rate is 9.5%. Your research indicates that the debt rating will as follows at different debt levels:

D/(D+E) Rating Interest rate

0% AAA 10%

10% AA 10.5%

20% A 11%

30% BBB 12%

40% BB 13%

50% B 14%

60% CCC 16%

70% CC 18%

80% C 20%

90% D 25%

The firm currently has 2 million shares outstanding at $30 per share. (Tax rate = 40%)

a. What is the firm's optimal debt ratio?

b. Assuming that the firm restructure and purchases stock with debt, what will the value pf the stock be after the restructuring?

Reference no: EM13933368

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