In: Finance
Given the following information, fill out the following table and determine what should be the optimal capital structure for Concours Corp. The company has $10 million in assets, a marginal tax rate of 30%, and each million in debt used causes Rd to increase by 1.0% and Rs to increase by .8%.
Debt | Rd | Rs | WACC |
0 | -- | 12% | 12% |
$1 Mill | |||
$2 Mill | |||
$3 Mill | |||
$4 Mill | |||
$5 Mill | |||
$6 Mill | |||
$7 Mill | |||
$8 Mill |
Debt($ Million) | Rd | Rs | WACC |
0 | 0.00% | 12.00% | 12.00% |
1 | 1.00% | 11.20% | 10.1500% |
2 | 2.00% | 10.40% | 8.6000% |
3 | 3.00% | 9.60% | 7.3500% |
4 | 4.00% | 8.80% | 6.4000% |
5 | 5.00% | 8.00% | 5.7500% |
6 | 6.00% | 7.20% | 5.4000% |
7 | 7.00% | 6.40% | 5.3500% |
8 | 8.00% | 5.60% | 5.6000% |
Optimal capital structure = onewith lowest WACC = Debt of $7
million
WACC = Rd*(1-Tax) *Debt/ Total assets + Rs*(Total assets - debt)/ Total assets
WORKINGS