What would be the weighted average cost of capital

Assignment Help Financial Management

Reference no: EM132051404

WACC and Optimal Capital Structure

F. Pierce Products Inc. is considering changing its capital structure. F. Pierce currently has no debt and no preferred stock, but it would like to add some debt to take advantage of low interest rates and the tax shield.

Its investment banker has indicated that the pre-tax cost of debt under various possible capital structures would be as follows:

Market Debt- to-Value Ratio (wd)	Market Equity-to-Value Ratio (ws)	Market Debt- to-Equity Ratio (D/S)	Before-Tax Cost of Debt (rd)
0.0	1.0	0.00	7.0%
0.2	0.8	0.25	8.0
0.4	0.6	0.67	10.0
0.6	0.4	1.50	12.0
0.8	0.2	4.00	15.0

F. Pierce uses the CAPM to estimate its cost of common equity, rs and at the time of the analaysis the risk-free rate is 6%, the market risk premium is 8%, and the company's tax rate is 30%. F.

Pierce estimates that its beta now (which is "unlevered" because it currently has no debt) is 0.8.

Based on this information, what is the firm's optimal capital structure, and what would be the weighted average cost of capital at the optimal capital structure? Do not round intermediate calculations. Round your answers to two decimal places.

DEBT	%
EQUITY	%
WACC	%

Reference no: EM132051404

Questions Cloud

Compute the inventory at december : Green Apple Stores, Inc., which uses the conventional retail inventory method, Compute the inventory at December

Female copper head snakes : What are some advantages and disadvantages for female copper head snakes that have the ability to produce both sexually and asexually?

Antibiotic resistance : List 3 activities or things humans do that increase the likelihood that antibiotic resistance will occur in bacteria

Calculate pawlsons wacc using market-value weights : The firm has 576 shares of common stock outstanding that sell for $4.00 per share. Calculate Pawlson's WACC using market-value weights.

What would be the weighted average cost of capital : What would be the weighted average cost of capital at the optimal capital structure? Do not round intermediate calculations.

What is filtrate : What is filtrate? What does it contain? Filtrate is the waste product created from the kidneys which eventually becomes urine. It contains metabolic waste

Relationship between tests of acquisition and payment cycle : Describe the relationship between tests of acquisition and payment cycle and tests of inventory

What is the 2015 cash flow to stockholders : In addition, you're told that the firm issued $4,700 in new equity during 2015 and redeemed $3,200 in outstanding long-term debt.

What is an example of something that comes from a farm : What is an example of something that comes from a farm that is considered pollution?

User Account

All Pages