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Minimum WACC, the Optimal Po, and the Optimal D/A%

Given:
Total assets $3,000,000
The risk free rate Krf 6%
The market rate Km 11%
the unlevered beta of the firm 1.1
The tax rate 40%

Assume that all earning are used for dividends (EPS = DPS) and 0 growth

The following 5 debt levels and associated Ks and DPS will be analyzed

Debt level associated Kd (1-T) associated DPS

$0 0% $4.00
$350,000 5.25% $4.25
$700,000 6.00% $4.50
$1,000,000 6.50% $4.75
$1,250,000 7.00% $5.00
$1,500,000 8.00% $5.10

Using this data, find the minimum WACC, the Optimal Po, and the Optimal D/A%

Solution Preview

Hello!
I'm attaching the answer and calculations in an Excel sheet. Answer is:

Minimum WACC = 10.93%
Optimal Po = $36.12
Optimal D/A % = 33.33%
[This corresponds to the $1,000,000 debt level]

Basically, in order to solve this exercise, I first found the levered ...

Solution Summary

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$2.19