fm16 9 - b = b U [1 + (1 – T)(D/E)]. b These r s...

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. Answers and Solutions: 16 - 9 16-12 Tax rate = 40% r RF = 5.0% b U = 1.2 r M – r RF = 6.0% From data given in the problem and table we can develop the following table: D/A E/A D/E r d r d (1 – T) Levered beta a r s b WACC c 0.00 1.00 0.0000 7.00% 4.20% 1.20 12.20% 12.20% 0.20 0.80 0.2500 8.00 4.80 1.38 13.28 11.58 0.40 0.60 0.6667 10.00 6.00 1.68 15.08 11.45 0.60 0.40 1.5000 12.00 7.20 2.28 18.68 11.79 0.80 0.20 4.0000 15.00 9.00 4.08 29.48 13.10 Notes: a These beta estimates were calculated using the Hamada equation,
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Unformatted text preview: b = b U [1 + (1 – T)(D/E)]. b These r s estimates were calculated using the CAPM, r s = r RF + (r M – r RF )b. c These WACC estimates were calculated with the following equation: WACC = w d (r d )(1 – T) + (w ce )(r s ). The firm’s optimal capital structure is that capital structure which minimizes the firm’s WACC. Elliott’s WACC is minimized at a capital structure consisting of 40% debt and 60% equity. At that capital structure, the firm’s WACC is 11.45%....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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