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15. 4/16/2010 Chapter Ch 15-12 Build a Model 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 Before-tax (wd) Cost Debt (rd) 0% 6.0% 10% 6.1% 20% 7.0% 30% 8.0% 40% 10.0% 50% 12.5% 60% 15.5% 70% 18.0% Input rate Market Data Risk-free risk premium Unlevered beta Tax rate 4.5% 5.5% 0.8 40.0% Fill in formulas in the yellow cells to find the optimum capital structure. Debt/Value Equity/Value Debt/Equity A-T Cost of Ratio (wd) Ratio (ws) Ratio (wd/ws) Debt (rd) 0% 10% 20% 30% 40% 50% 60% 70% 1.0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 Levered Beta Cost of Equity 0.00 0.11 0.25 0.43 0.67 1.00 1.50 2.33 WACC at optimum debt ratio = Optimum debt ratio = 1 of 1 WACC ... View Full Document

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