Question

Zetta Company has unleveraged beta 1.3, risk free rate 7% and market risk premium for 5%. The applicable tax rate is 40%. The company needs to finance its new project under two different scenarios.

Scenario Debt ratio Interest rate EPS
1 0% 0% $2.40
2 30% 10% $3.40

6. WACC under scenario number 2 equals to *

a)12.42%

b)11.55%

c)13.50%

d)14.24%

e)None of the above

7. The price per share under scenario number 2 equals to *

a)$28.50

b)$26.50

c)$24.30

d)$22.40

e)None of the above

8. Which of the following statements is correct? *

a)The optimal capital structure refers to the debt ratio that can minimize the WACC and maximize the share price.

b)The optimal capital structure refers to the debt ratio that can maximize the WACC and minimize the share price.

c)The optimal capital structure refers to the debt ratio that can maximize the WACC and maximize the share price.

d)The optimal capital structure refers to the debt ratio that can minimize the WACC and minimize the share price.

e)None of the above

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -