% of Debt..........cost of Debt..........% Equity.........Cost Equity......WACC

Question

% of Debt..........cost of Debt..........% Equity.........Cost Equity......WACC

50%....................5%..........................50%.................12%..................?

40%...................4.9%.......................60%....................9%...................?

30%...................4.5%.......................70%...................8.5%................?

20%...................4.4%.......................80%...................8.3%................?

What is the optimal capital structure based on the above info? Which is best?

Explanation / Answer

Hi,

Please find the answer as follows:

WACC = Cost of Debt*Weight of Debt + Cost of Equity*Weight of Equity

Table with all the figures is provided below:

Based on the above calculations, Optimal Capital Structure is 30% Debt and 70% Equity as it results in the lowest WACC of 7.30%.

Thanks.

% of Debt Cost of Debt % of Equity Cost of Equity WACC 50% 5% 50% 12% 8.50% 40% 4.90% 60% 9% 7.36% 30% 4.50% 70% 8.50% 7.30% 20% 4.40% 80% 8.30% 7.52%

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