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Jon Stark ,Inc
Jon Stark ,Inc. Has estimated the costs of debt and equity capital for various proportions of debt in its capital structure.
|
% of Debt |
Cost of Debt |
Cost of Equity |
|
0% |
- |
13.0% |
|
10% |
5.4% |
13.3 |
|
20% |
5.6 |
13.8 |
|
30% |
5.8 |
14.4 |
|
40% |
6.3 |
15.2 |
|
50% |
7.0 |
16.0 |
|
60% |
8.2 |
17.0 |
Based on these estimates, determine the WACC of Jon Stark’s optimal capital structure. Answers should be rounded off to 4 decimal places.
Expert Solution
| Ans | Wd | We | Kd | Ke | ||
| % of Debt | % of equity | Cost of Debt | Cost of Equity | WACC = Wd x Kd + We x Ke | ||
| 0% | 100% | 0.00% | 13.00% | 13.0000% | ||
| 10% | 90% | 5.40% | 13.30% | 12.5100% | ||
| 20% | 80% | 5.60% | 13.80% | 12.1600% | ||
| 30% | 70% | 5.80% | 14.40% | 11.8200% | ||
| 40% | 60% | 6.30% | 15.20% | 11.6400% | ||
| 50% | 50% | 7.00% | 16.00% | 11.5000% | Lowest | |
| 60% | 40% | 8.20% | 17.00% | 11.7200% | ||
| Since WACC is minimum when Debt equity proportion is (50:50), that is 11.5000% Optimal capital structure. | ||||||
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