ACB Inc. is examining its capital structure with the intent of arriving at an optimal debt ratio. Itcurrently has no debt and has a beta of 1.4. T-Bond rate is 7.5%. Your research indicates thatthe debt rating will be as follows at different debt levels:Your research indicates that the debt rating will be as follows at different debt levels:D/(D+E)Rating Interest rate0%AAA9.5%10%AA10%20%10.5%30%BBB11.5%40%12.5%50%13.5%60%15%70%CC18%80%20%90%D25%The firm currently has 2 million shares outstanding at $20 per share, and the tax rate is 35%.Assume an equity market risk premium of 6%.What is the firm's optimal debt ratio?

Unlevered beta of the stock is 1.4, using the formula below, levered beta at various debt level will…

Answered: ACB Inc. is examining its capital…

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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