For your target WACC, you will have determined what today’s cost of debt is for your company (usually, from existing corporate balance sheets or annual reports, or both). Now, for lower or higher amounts of debt, you have to (somehow) determine the costs of debt as the debt/equity ratio is changed. The textbook (Table 15-5, p. 610) illustrates this process for you. Rather than each team having to spend a lot of time visiting/calling bankers, we will use the following as “givens” for you:
o For each decrement or increment of 10% from your target ratio of debt and the corresponding debt costs, the debt costs decrease/increase by 10% from the target.
o For each decrement or increment of 20% from your target ratio of debt and the corresponding debt costs, the debt costs decrease/increase by 25% from the target.
o For each decrement or increment of 40% from your target ratio of debt and the corresponding debt costs, the debt costs decrease/increase by 60% from the target.
Sample Solution
