OPTIMAL CAPITAL STRUCTURE

1. D
2. D
3. C
4. B
5. A
6. B
7. D
8. D
9. C
10. C

PROBLEM SOLVING:

PROBLEM A.
1. A table should be made to show the cursory computation of the mean:

A B C D
Structure Price per share Probability Mean
1 P5.20 15% 0.78
2 P5.25 30% 1.575
3 P5.30 45% 2.385
4 P5.35 10% 0.535
Overall Mean 5.275

2. A table should be made to show the cursory computation of the mean:

E F G H
Price per Deviation Deviation Sq. Deviation
share Squared x Probability
E – Mean F2 GxC
P5.20 -0.075 0.005625 0.00084375
P5.25 -0.025 0.000625 0.0001875
P5.30 0.025 0.000625 0.00028125
P5.35 0.075 0.005625 0.0005625
Variance 0.001875
Standard 0.0433
Deviation
(Square Root
of Variance)

0% P55.67 (at equity portion of 50%) ( ) ( ) PROBLEM C. Debt Dividends Cost of Stock Ratio per share equity Price (Div1) (ke) P0 0% P4.0% P56.PROBLEM B. Unlevered Beta ( )( ) ( )( ) ( )( ) 3. The capital structure with the highest stock price is the optimal capital structure.0% P55.17 P0 = 1.00 50% P6. New Cost of Equity using New Beta of 1. Current Cost of Equity ( ) ( ) 2. What is the equity ratio at the optimal capital structure? 100% .0% P54.00 14. What is the price of the stock if the firm is unlevered? 56.50 13. To determine the optimal capital structure.50 11. the stock price (P0) must be computed. 1. What is the debt ratio at the optimal capital structure? 0% 4. New (Levered) Beta (at debt-to-equity ratio of 50%:50%) ( )( ) ( )( ) 4.56 40% P5.00 12. What is the price of the stock for each level of debt? (Refer to table above) 3.25 2.50 15.0% P54.25 25% P5.55 75% P6.

78% 0.90 0.6% Debt-to.80 0.80 = 0.20/0.30/0.51 18.25 A 7.10 0.60 = 0.38 17.11 0. This problem uses a trial-and-error method to determine which capital structure shows the lowest WACC.70 0.50 = 1.04% 14.30 0.80 = 1.68 19. Debt-to-equity Bond Before- total assets total assets ratio (D/E) rating tax cost ratio (wd) ratio (wc) of debt 0.40/0.11 AA 7.04% 0.60 = 1.00 B 9.50/0.90 = 1.43 A 8.8% 0.50 0.20/0.50 = 1.10/0.10% 0.2:  Unlevered Beta ( )( ) ( )( ) ( )( ) .90 = 0.50% 0.67 0.PROBEM D.40/0. Debt-to.20 0.36% 13.25 0.0% 0.00 Beta levered old (at debt to equity of 10%:90% ( ) =6% + (14%-6%)  Beta Unlevered = 1.56% 1.08% 14.24% 15. Resulting Resulting Cost of WACC equity ratio Beta (β) Equity (D/E) ( ) =6% + (14%-6%) 0.28 16.92 21.40 0.70 = 0.50 0. Equity-to.50/0.0% 0.67 BB 8.70 = 1.30/0.43 0.2% 0.10/0.60 0.44% 13.

78% (At 50: 50) WACC = [9.24%)90%] = 15.08%)70%] = 14.50% (At 30: 70) WACC = [8% (1-0.10% (At 40: 60) WACC = [8. Lowest Weighted Average Cost of Capital 3. Not necessarily the highest EPS.2% (1-0. New (Levered) Beta (at debt-to-equity ratio of 20%:80%) ( )( ) ( )( ) New (Levered) Beta (at debt-to-equity ratio of 30%:70%) ( )( ) ( )( ) New (Levered) Beta (at debt-to-equity ratio of 40%:60%) ( )( ) ( )( ) New (Levered) Beta (at debt-to-equity ratio of 50%:50%) ( )( ) ( )( ) In determining the Optimal Capital Structure.04% (At 20: 80) WACC = [7.4) 50%] +[ (21.6% (1-0. WACC shall be computed in order to determine the Optimal Capital Structure.36%)50%] = 13.4) 30%] +[ (18. the following are the determinants: 1.56% .4) 20%] +[ (17. The optimal debt ratio shall be the debt ratio next to the debt ratio with the highest EPS.44%)60%] = 13.8% (1-0.04%)80%] = 14. In this problem.4) 40%] +[ (19. WACC = [Kd (1-TR) DR] +[ (Ke)ER] (At 10: 90) WACC = [7% (1-0. Highest Stock Price 2.4) 10%] +[ (16.

What is the cost of equity for each level of equity ratio (80%. What is the Beta coefficient for each level of debt ratio (20%. What is the beta levered at 10:90 debt to equity ratio? 1.40%.20 3. ROA = ROE = ROIC . the value of the firm increases.50%)? (refer to table) 4.50%) 6.  IF the firm is unlevered.30%.40%.70%:60%. What is the weight of equity at optimal capital structure? 50% PROFITABILITY RATIOS: ROA = ROE = ( ) ROIC= =  IF the ROIC is higher than WACC.20%.1. What is the Weighted Average Cost of Capital for each capital structure? (refer to table) 7. What is the weight of debt at optimal capital structure? 50% 8. What is the unlevered beta using Hamada Equation? 1.30%.50%)? (refer to table) 5. What is the after tax cost of debt for each level of debt ratio (10%.28 2.

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