6. Backroads Sporting Goods is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different debt levels, the company's treasury staff has consulted with investment hankers and, on the basis of those cussions, has created the following table: Debt-to-Capital Ratio 0.0 0.2 0.4 0.6 0.8 a 9.56% h. 10.48% Equity-to- Capital Ratio (w.) 1.0 0.8 06 0.4 0.2 d. 11.45 % e 12.25% Debt-to-Equity Ratio (DE) 0.00 0.25 0.67 1.50 4.00 Bond Rating A BBB BB с D Before-Tax Cost of Debt Backroads uses the CAPM to estimate its cost of common equity, r.. The company estimates that the risk-free rate is 6%, the market risk premium is 5%, and its tax rate is 40%. Backroads estimates that if it had no debt, its "unlevered" beta, bu, would be 1.25. On the basis of this information, what would be the WACC at the optimal capital structure? 6.5% 7.5 9.5 11.5 14.5
6. Backroads Sporting Goods is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. To estimate how much its debt would cost at different debt levels, the company's treasury staff has consulted with investment hankers and, on the basis of those cussions, has created the following table: Debt-to-Capital Ratio 0.0 0.2 0.4 0.6 0.8 a 9.56% h. 10.48% Equity-to- Capital Ratio (w.) 1.0 0.8 06 0.4 0.2 d. 11.45 % e 12.25% Debt-to-Equity Ratio (DE) 0.00 0.25 0.67 1.50 4.00 Bond Rating A BBB BB с D Before-Tax Cost of Debt Backroads uses the CAPM to estimate its cost of common equity, r.. The company estimates that the risk-free rate is 6%, the market risk premium is 5%, and its tax rate is 40%. Backroads estimates that if it had no debt, its "unlevered" beta, bu, would be 1.25. On the basis of this information, what would be the WACC at the optimal capital structure? 6.5% 7.5 9.5 11.5 14.5
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:6. Backroads Sporting Goods is trying to determine its optimal capital structure, which now consists of
only debt and common equity. The firm does not currently use preferred stock in its capital structure,
and it does not plan to do so in the future. To estimate how much its debt would cost at different debt
levels, the company's treasury staff has consulted with investment bankers and, on the basis of those
cussions, has created the following table:
4
Debt-to-Capital
Ratio
0.0
0.2
0.4
0.6
a 9.56%
h 10.48%
Equity-to-
Capital Ratio
11.13%
d. 11.45%
e. 12.25 %
(w.)
1.0
0.8
0.6
0.4
0.2
Debt-to-Equity
Ratio
(D/E)
0.00
0.25
0.67
1.50
4.00
Bond Rating
A
BBB
BB
Before-Tax
Cost of Debt
65%
7.5
9.5
D
Backroads uses the CAPM to estimate its cost of common equity. r.. The company estimates that the
risk-free rate is 6%, the market risk premium is 5%, and its tax rate is 40%. Backroads estimates that
if it had no debt, its "unlevered" beta, bu, would be 1.25. On the basis of this information, what
would be the WACC at the optimal capital structure?
11.5
145
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