[ashikr65]

I am asked to calculate the Optimal Capital Structure for a company.

The company has:
Debt = 500K
Equity = 2000K (calculated from the Num. of outstanding share * Price per share)
So the current Value of the firm is: Debt + Equity = 500 + 2000 = 2500

The debt ratio is: Debt / Firm Value = 500/2500 = 1/5
The equity ratio is: Equity / Firm Value = 2000/2500 = 4/5
Debt Equity ratio: Debt / Equity = 1/4
Beta = 1.15
Market risk premium = 5.5% = 0.055 (given)
Tax rate = 40% = 0.4 (given)

Interest rate of debt with "BBB" rating is: 10%
T-Bill or risk-free rate is: 6%

Confusion 1: If I calculate market risk premium from BBB rate - T-Bill rate, it is = 4%
Is my calculation correct?

Therefore, (considering given market risk premium)
CAPM or Rs or Re = Risk-Free rate + Beta(Market Premium)

[ashikr65]

Sorry I could not finish my question and mistakenly placed it:

so Re = 6% + 1.15(5.5%) = 0.1233 or 12.33%

Confusion 2:
Rd or Cost of Debt = 10% or it has to be calculated somehow?
Is the interest rate on debt and cost of debt the same thing?

This is the only part I am worried about after that I can calculate the WACC at every level of debt ratio to find the optimal capital structure.

Please help me ASAP.

Thanks

[caroline88]

Cost of debt is 10%.

Cost of debt is the cost a firm payout for obtaining a debt, so it is the interest rate of 10%