# fm16 9 - b = b U[1(1 – T(D/E b These r s estimates were...

This preview shows page 1. Sign up to view the full content.

. 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,
This is the end of the preview. Sign up to access the rest of the document.

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%....
View Full Document

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern