Finance Chapter 9 Problem 1 and 4

Chapter 9 ProblemsProblem 1An investment -banking firm as established the following after-tax cost of debt and cost of equity for Mann’s Fine Dining Establishments incorporated. What is Mann’s Fine Dining Establishments incorporated’s optimal capital structure?Proportion of Debt After-Tax Cost of Debt Cost of Equity WACC0.0% 13.5%10.0% 5.5% 13.6%20.0% 5.6% 13.8%30.0% 5.8% 14.1%40.0% 6.2% 14.6%50.0% 6.8% 15.4%60.0% 7.7% 16.4%70.0% 8.9% 17.7%Problem 4Park Plaza Hotels has estimated the following cost of debt (before-tax) and cost of equity. What is Park Plaza Hotel’s optimal capital structure assuming a 40 percent effective tax rate?Effective Tax Rate 40%Proportion of Debt After-Tax Cost of Debt Cost of Equity WACC0.0% 14.3%10.0% 9.5% 14.4%20.0% 9.6% 14.7%30.0% 9.7% 15.2%40.0% 10.1% 16.0%50.0% 10.8% 17.0%60.0% 12.0% 18.5%70.0% 14.0% 20.5%



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