Solutions(chapter 10,11,12,15,17)

Ch15P13BuildaModel.xlsx

Build a Model

Solution							7/16/15
Chapter:	15
Problem:	13
Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher's unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm's optimal capital structure and what is the weighted average cost of capital at the optimal structure?
Percent Financed with Debt (wd)	Before-tax Cost Debt (rd)		Input Data
			Risk-free rate		4.5%
			Market risk premium		5.5%
			Unlevered beta		0.8
0%	6.0%		Tax rate		40.0%
10%	6.1%
20%	7.0%
30%	8.0%
40%	10.0%
50%	12.5%
60%	15.5%
70%	18.0%
Fill in formulas in the yellow cells to find the optimum capital structure.
Debt/Value	Equity/Value	Debt/Equity	A-T Cost of	Levered	Cost of
Ratio (wd)	Ratio (ws)	Ratio (wd/ws)	Debt (rd)	Beta	Equity	WACC
0%	1.0	0.00
			DII Labs: After tax cost of debt.	10%	0.9	0.11
20%	0.8	0.25
30%	0.7	0.43
40%	0.6	0.67
50%	0.5	1.00
60%	0.4	1.50
70%	0.3	2.33
		WACC at optimum debt ratio =
		Optimum debt ratio =

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