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Capital Structure and Leverage 17

Capital Structure and Leverage 17 - Given this information...

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Old Exam Questions - Capital Structure and Leverage Page 17 of 31 Pages Given this information, determine the new enterprise value of the firm (that is, the total value of the firm including the market value of the firm’s debt and the market value of the firm’s equity). A. $4,973 million B. $5,091 million C. $4,852 million D. $5,034 million E. $4,918 million 26. Assume that your company is trying to determine its optimal capital structure, which consists only of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Percent Financed Percent Financed Debt/Equity Bond Before-Tax With Debt With Equity Ratio Rating Cost of Debt 0.10 0.90 0.10/0.90 = 0.11 AA 7.0% 0.20 0.80 0.20/0.80 = 0.25 A 7.2% 0.30 0.70 0.30/0.70 = 0.43 A 8.0% 0.40 0.60 0.40/0.60 = 0.67 BB 8.8% 0.50 0.50 0.50/0.50 = 1.00 B 9.6% Now assume that the company’s tax rate is 40 percent, that the company uses the CAPM to estimate its cost of common equity, K s , that the risk-free rate is 5 percent and the market risk premium is 6 percent. Finally assume that if it has no debt its WACC
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