Problem # 1

WACC and optimal capital structure – Elliott Athletics is trying to determine its optimal capital structure, which now consists of only debt and common equity. The firm does not currently use preferred stock in its capital structure, and it does not plan to do so in the future. Its treasury staff has consulted with investment bankers and, on the basis of those discussions, has created the following table showing its debt cost at different levels:

Column 1 = Debt-to-Assets Ratio
Column 2 = Equity-to-Assets Ratio
Column 3 = Debt-to-Equity Ratio (D/E)
Column 4 = Bond Rating
Column 5 = Before-tax-Cost of Debt
0.0