EBIT was $55 million in 2016, and is expected to remain constant for 2017. The firm is all equity financed, and there are 15 million shares outstanding. The corporate tax rate is 37.5%, the risk-free rate is 3.5% and the market risk premium is 4%. The firm’s beta was estimated at 1.25 by the investment bankers who have also supplied the following estimates of debt costs for different capital structures: At 20 percent debt, the cost of debt would be 6.3%; at 30 percent debt, the cost would be 7.5%; at 40 percent debt, the cost would be 8.7%; at 50 percent debt, the cost would be 10%
For each capital structure under consideration for the pizzeria chain (see given information above), find the levered beta, the cost of equity and the WACC.
Using the WACC values found in g, find the corporate value. At which level of debt would the firm value be maximized?