Your company’s beta was estimated at1.1. Currently, Treasury bills areyielding 4

Question

1. Your company’s beta was estimated at1.1.  Currently, Treasury bills areyielding 4% and the expected rate of return on the market index wasestimated to be12%.  Usingvarious combinations of debt and equity, under the assumption thatthe costs of each component stays constant, show the effect ofincreasing leverage on the weighted average cost of capital of thefirm. Is there a particular capital structure that maximizesthe value of the firm? Explain.

If someone can please help me with this as soon as possible, Iwould greatly appreciate it. Thank you. If someone can please help me with this as soon as possible, Iwould greatly appreciate it. Thank you.

Explanation / Answer

Debt/Value Debt/Equity
(Increases) Equity/Value
(Decreases) Weighted Average
Cost of Capital -
WACC
(Decreases) Cost of Equity -
RE
(Increases) Debt
(Increases) Vu (Remains
constant) Vl
(Increases)0 0 1 12.88% 12.88% 0 13625776 136257760.01 0.01 0.99 12.83% 12.90% 136257.8 13625776 136802800.02 0.02 0.98 12.78% 12.92% 272515.5 13625776 137347830.03 0.031 0.97 12.73% 12.93% 408773.3 13625776 137892860.04 0.042 0.96 12.67% 12.95% 545031.1 13625776 138437890.05 0.053 0.95 12.62% 12.97% 681288.8 13625776 138982920.06 0.064 0.94 12.57% 12.99% 817546.6 13625776 139527950.07 0.075 0.93 12.52% 13.01% 953804.3 13625776 140072980.08 0.087 0.92 12.47% 13.03% 1090062 13625776 140618010.09 0.099 0.91 12.42% 13.05% 1226320

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