Expected equity market risk premium

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Reference no: EM131016840

Union Street Records is considering a new capital structure. The CFO has prepared a list of options:

Option	Debt-to-capital ratio	Bond rating	Interest rate
1	0	AA	0.04
2	0.25	BBB	0.05
3	0.5	B	0.07
4	0.75	C	0.09

The company currently has a debt-to-capital ratio of 0.75 (option 4) and an equity beta of 1.9. The tax rate is 34%.

The risk-free rate is 2% and the expected equity market risk premium is 9%.

1. What is the unlevered beta?

2. Find the levered beta for each option. What is the levered beta for option 2 (debt-to-capital ratio of 0.25)?

3. Find the cost of equity for each option. What is the cost of equity for option 2 (debt-to-capital ratio of 0.25)?

4. Find the WACC for each option. What is the WACC for option 3 (debt-to-capital ratio of 0.5)?

5. What is the WACC at the optimal capital structure?

Reference no: EM131016840

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