Assume that the investment banker of Grumpy Gargamel's Company gave you the following estimated costs of debt for the firm at different capital structures:
% Financed With Debt rd
0% 0%
20 10.0%
30 10.5
40 12.0
50 15.0
At 0% debt, the company has 1,000,000 shares outstanding. If the company were to recapitalize, debt would be issued, and the ALL funds received from lenders would be used to repurchase stock (so shares outstanding and price of the stock would change as capital structure changes). Grumpy Gargamel's has a corporate tax rate of 35%, its unlevered beta (Bu) is 1.0, the risk-free rate is 7 percent, and the market risk premium is 7 percent. Assume the firm has EBIT of $400,000 which will stay fixed forever.