Levels Tought:
Elementary,Middle School,High School,College,University,PHD
Teaching Since: | Apr 2017 |
Last Sign in: | 328 Weeks Ago |
Questions Answered: | 3232 |
Tutorials Posted: | 3232 |
MBA,MCS,M.phil
Devry University
Jan-2008 - Jan-2011
MBA,MCS,M.Phil
Devry University
Feb-2000 - Jan-2004
Regional Manager
Abercrombie & Fitch.
Mar-2005 - Nov-2010
Regional Manager
Abercrombie & Fitch.
Jan-2005 - Jan-2008
Union Street Records is considering a new capital structure. The CFO has prepared a list of options:
Option | Debt-to-capital ratio | Bond rating | Interest rate |
1 | 0 | AA | 0.04 |
2 | 0.25 | BBB | 0.05 |
3 | 0.5 | B | 0.07 |
4 | 0.75 | C | 0.09 |
The company currently has a debt-to-capital ratio of 0.75 (option 4) and an equity beta of 1.9. The tax rate is 34%.
The risk-free rate is 2% and the expected equity market risk premium is 9%.
1. What is the unlevered beta?
2. Find the levered beta for each option. What is the levered beta for option 2 (debt-to-capital ratio of 0.25)?
3. Find the cost of equity for each option. What is the cost of equity for option 2 (debt-to-capital ratio of 0.25)?
4. Find the WACC for each option. What is the WACC for option 3 (debt-to-capital ratio of 0.5)?
5. What is the WACC at the optimal capital structure?
Hel-----------lo -----------Sir-----------/Ma-----------dam----------- T-----------han-----------k Y-----------ou -----------for----------- us-----------ing----------- ou-----------r w-----------ebs-----------ite----------- an-----------d a-----------cqu-----------isi-----------tio-----------n o-----------f m-----------y p-----------ost-----------ed -----------sol-----------uti-----------on.----------- Pl-----------eas-----------e p-----------ing----------- me----------- on----------- ch-----------at -----------I a-----------m o-----------nli-----------ne -----------or -----------inb-----------ox -----------me -----------a m-----------ess-----------age----------- I -----------wil-----------l