Spreads over LIBOR for Alternative Debt-to-Capital Ratios
|
D/D + E
|
Spread (bps)
|
|
Less than 0.40
|
200
|
|
0.40 to 0.49
|
300
|
|
0.50 to 0.69
|
400
|
|
0.60 to 0.69
|
600
|
|
0.70 to 0.79
|
800
|
|
0.80 to 0.89
|
1,000
|
|
0.90 or higher
|
1,200
|
- The current 12-month LIBOR is 4.5 percent.
- The market risk premium is 4 percent, and unlevered beta is 0.9.
- The risk-free rate is 4.25 percent.
- The company's tax rate is 36 percent.
1. Determine the WACC for levels of the debt-to-capital ratio.
2. Recommend a target capital structure given that the company is concerned with achieving the lowest possible cost of capital.