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Consider the following data towards a firm's potential leverage. Assume that the firm can lever up in increments of 10% of firm value upto 60% debt in the capital mix. Further assume that the CAPM holds. How much debt should the firm use to minimize its financing cost? Corporate Income tax rate Asset beta 45% 1.2 Treasury instrument rate Expected return on market portfolio 6% 10% Debt/Value Credit rating for the debt Credit spread 0% AAA 2% 10% AA 4% 20% A 6% 30% A- 8% 40% BAA 10% 50% BBA 14% 60% BBB 20% >60% Junk Credit not available

Consider the following data towards a firm's potential leverage. Assume that the firm can lever up in increments of 10% of firm value upto 60% debt in the capital mix. Further assume that the CAPM holds. How much debt should the firm use to minimize its financing cost? Corporate Income tax rate Asset beta 45% 1.2 Treasury instrument rate Expected return on market portfolio 6% 10% Debt/Value Credit rating for the debt Credit spread 0% AAA 2% 10% AA 4% 20% A 6% 30% A- 8% 40% BAA 10% 50% BBA 14% 60% BBB 20% >60% Junk Credit not available

Entrepreneurial Finance
Entrepreneurial Finance
6th Edition
ISBN:9781337635653
Author:Leach
Publisher:Leach
Chapter14: Security Structures And Determining Enterprise Values
Section: Chapter Questions
Problem 1hM
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Consider the following data towards a firm's potential leverage. Assume that the firm can lever up in increments of 10% of firm value upto 60% debt in the capital mix. Further assume that the CAPM holds. How much debt should the firm use to minimize its financing cost? Corporate Income tax rate Asset beta 45% 1.2 Treasury instrument rate Expected return on market portfolio 6% 10% Debt/Value Credit rating for the debt Credit spread 0% AAA 2% 10% AA 4% 20% A 6% 30% A- 8% 40% BAA 10% 50% BBA 14% 60% BBB 20% >60% Junk Credit not available
Transcribed Image Text:Consider the following data towards a firm's potential leverage. Assume that the firm can lever up in increments of 10% of firm value upto 60% debt in the capital mix. Further assume that the CAPM holds. How much debt should the firm use to minimize its financing cost? Corporate Income tax rate Asset beta 45% 1.2 Treasury instrument rate Expected return on market portfolio 6% 10% Debt/Value Credit rating for the debt Credit spread 0% AAA 2% 10% AA 4% 20% A 6% 30% A- 8% 40% BAA 10% 50% BBA 14% 60% BBB 20% >60% Junk Credit not available
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