Jersey Computer Company has estimated the costs of debt andequity captial (with

Question

Jersey Computer Company has estimated the costs of debt andequity captial (with bankruptcy and agency costs) for variousproportions of debt in its capital structure: Proportion                              Aftertax cost of Debt,ki                                    Costof Equity, ke of debt 0.00                                          ----                                                              12.0% 0.10                                          4.7%                                                             12.1 0.20                                          4.9                                                                12.5 0.30                                          5.1                                                                13.0 0.40                                          5.5                                                                13.9 0.50                                          6.1                                                                15.0 0.60                                          7.5                                                                17.0 a) Determine the firm's optimal capital structure, assuming amarginal income tax rate (T) of 40 percent. b) Suppose that the firm's current capital structure considstsof 30 percent data (and 70 percent equity). How much higheris its weighted cost of capital than at the optimal capitalstructure? Jersey Computer Company has estimated the costs of debt andequity captial (with bankruptcy and agency costs) for variousproportions of debt in its capital structure: Proportion                              Aftertax cost of Debt,ki                                    Costof Equity, ke of debt 0.00                                          ----                                                              12.0% 0.10                                          4.7%                                                             12.1 0.20                                          4.9                                                                12.5 0.30                                          5.1                                                                13.0 0.40                                          5.5                                                                13.9 0.50                                          6.1                                                                15.0 0.60                                          7.5                                                                17.0 a) Determine the firm's optimal capital structure, assuming amarginal income tax rate (T) of 40 percent. b) Suppose that the firm's current capital structure considstsof 30 percent data (and 70 percent equity). How much higheris its weighted cost of capital than at the optimal capitalstructure? of debt 0.00                                          ----                                                              12.0% 0.10                                          4.7%                                                             12.1 0.20                                          4.9                                                                12.5 0.30                                          5.1                                                                13.0 0.40                                          5.5                                                                13.9 0.50                                          6.1                                                                15.0 0.60                                          7.5                                                                17.0 a) Determine the firm's optimal capital structure, assuming amarginal income tax rate (T) of 40 percent. b) Suppose that the firm's current capital structure considstsof 30 percent data (and 70 percent equity). How much higheris its weighted cost of capital than at the optimal capitalstructure?

Explanation / Answer

Weighted Average Cost ofCapital (WACC) =   0.90 * 0.121 + 0.10 * 0.047(0.6)= 0.1117 (or) 11.17% Weighted Average Cost of Capital(WACC) =   0.80 * 0.125 + 0.20 * 0.049(0.6) = 0.1058(or) 10.58% Weighted Average Cost of Capital(WACC) =   0.70 * 0.13 + 0.30 * 0.051(0.6) = 0.10018(or) 10.02% Weighted Average Cost of Capital(WACC) =   0.60 * 0.139 + 0.40 * 0.055(0.6) = 0.0966(or) 9.66%   Weighted Average Cost of Capital(WACC) =   0.50 * 0.15 + 0.50 * 0.061(0.6) = 0.0933(or) 9.33%   Weighted Average Cost of Capital(WACC) =   0.40 * 0.17 + 0.60 * 0.075(0.6) = 0.095(or) 9.5%   Hope it may help you Weighted Average Cost ofCapital (WACC) =   0.90 * 0.121 + 0.10 * 0.047(0.6)= 0.1117 (or) 11.17% Weighted Average Cost of Capital(WACC) =   0.80 * 0.125 + 0.20 * 0.049(0.6) = 0.1058(or) 10.58% Weighted Average Cost of Capital(WACC) =   0.70 * 0.13 + 0.30 * 0.051(0.6) = 0.10018(or) 10.02% Weighted Average Cost of Capital(WACC) =   0.60 * 0.139 + 0.40 * 0.055(0.6) = 0.0966(or) 9.66%   Weighted Average Cost of Capital(WACC) =   0.50 * 0.15 + 0.50 * 0.061(0.6) = 0.0933(or) 9.33%   Weighted Average Cost of Capital(WACC) =   0.40 * 0.17 + 0.60 * 0.075(0.6) = 0.095(or) 9.5%  

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