# Reacher Technology has consulted with investment bankers and

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Chapter 15. Ch 15-12 Build a Model

Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher's unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm's optimal capital structure and what is the weighted average cost of capital at the optimal structure?

Percent Financed with Debt (wd) Before-tax Cost Debt (rd) Input Data
Risk-free rate 4.5%
Unlevered beta 0.8
0% 6.0% Tax rate 40.0%
10% 6.1%
20% 7.0%
30% 8.0%
40% 10.0%
50% 12.5%
60% 15.5%
70% 18.0%

Fill in formulas in the yellow cells to find the optimum capital structure.

Debt/Value Equity/Value Debt/Equity A-T Cost of Levered Cost of
Ratio (wd) Ratio (ws) Ratio (wd/ws) Debt (rd) Beta Equity WACC
0% 1.0 0.00
10% 0.9 0.11
20% 0.8 0.25
30% 0.7 0.43
40% 0.6 0.67
50% 0.5 1.00
60% 0.4 1.50
70% 0.3 2.33

WACC at optimum debt ratio =
Optimum debt ratio =

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• Copy of Ch15 P12 Build a Model_1 - week 6 Finance.xlsx
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Solution Summary

Reacher Technology has consulted with investment bankers and determined the interest rate it would pay for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an estimate of Reacher's unlevered beta, and the tax rate are also shown below. Based on this information, what is the firm's optimal capital structure and what is the weighted average cost of capital at the optimal structure?

Percent Financed with Debt (wd) Before-tax Cost Debt (rd) Input Data
Risk-free rate 4.5%
Unlevered beta 0.8
0% 6.0% Tax rate 40.0%
10% 6.1%
20% 7.0%
30% 8.0%
40% 10.0%
50% 12.5%
60% 15.5%
70% 18.0%

Fill in formulas in the yellow cells to find the optimum capital structure.

Debt/Value Equity/Value Debt/Equity A-T Cost of Levered Cost of
Ratio (wd) Ratio (ws) Ratio (wd/ws) Debt (rd) Beta Equity WACC
0% 1.0 0.00
10% 0.9 0.11
20% 0.8 0.25
30% 0.7 0.43
40% 0.6 0.67
50% 0.5 1.00
60% 0.4 1.50
70% 0.3 2.33

WACC at optimum debt ratio =
Optimum debt ratio =

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Extracted Content from Question Files:

• Copy of Ch15 P12 Build a Model_1 - week 6 Finance.xlsx

4/16/2010

Chapter 15. Ch 15-12 Build a Model

Reacher Technology has consulted with investment bankers and determined the interest rate it would pay
for different capital structures, as shown below. Data for the risk-free rate, the market risk premium, an
estimate of Reacher's unlevered beta, and the tax rate are also shown below. Based on this information,
what is the firm's optimal capital structure and what is the weighted average cost of capital at the optimal
structure?

Input Data
Percent
Financed Risk-free rate 4.5%
Before-tax
with Debt Market risk premium 5.5%
Cost Debt (rd)
(wd) Unlevered beta 0.8
0% 6.0% Tax rate 40.0%
10% 6.1%
20% 7.0%
30% 8.0%
40% 10.0%
50% 12.5%
60% 15.5%
70% 18.0%

Fill in formulas in the yellow cells to find the optimum capital structure.

Debt/Value Equity/Value Debt/Equity A-T Cost of Levered Cost of
Ratio (wd) Ratio (ws) Ratio (wd/ws) Debt (rd) Beta Equity WACC
0% 1.0 0.00
10% 0.9 0.11
20% 0.8 0.25
30% 0.7 0.43
40% 0.6 0.67
50% 0.5 1.00
60% 0.4 1.50
70% 0.3 2.33

WACC at optimum debt ratio =
Optimum debt ratio =

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