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

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    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%

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    Solution Preview

    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

    The optimal PO and minimum WACC are determined.