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8. Flashtronics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Bond rating B-T cost of debt AA Debt-to-total- assets ratio (wa) 0.10 0.20 0.30 0.40 0.50 Equity-to-total- assets ratio (we) 0.90 0.80 0.70 0.60 0.50 Debt-to-equity ratio (D/E) 0.10/0.90 = 0.11 0.20/0.80 = 0.25 0.30/0.70 = 0.43 0.40/0.60 = 0.67 0.50/0.50 = 1.00 A 6.0% 6.6 7.3 BB 7.9 8.7 The company's tax rate is 35 percent. The company currently has a D/E ratio of 20% and uses the CAPM to estimate its cost of common equity, ks. The risk-free rate is 4.5 percent and the market risk premium is 6 percent. Flashtronics' current beta is 1.3. On the basis of this information, what is Flashtronics' optimal capital structure, and what is the firm's weighted average cost of capital (WACC) at this optimal capital structure? You must show the WACC at each debt level. (6 pts.) 8. Flashtronics is trying to determine its optimal capital structure. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table: Bond rating B-T cost of debt AA Debt-to-total- assets ratio (wa) 0.10 0.20 0.30 0.40 0.50 Equity-to-total- assets ratio (we) 0.90 0.80 0.70 0.60 0.50 Debt-to-equity ratio (D/E) 0.10/0.90 = 0.11 0.20/0.80 = 0.25 0.30/0.70 = 0.43 0.40/0.60 = 0.67 0.50/0.50 = 1.00 A 6.0% 6.6 7.3 BB 7.9 8.7 The company's tax rate is 35 percent. The company currently has a D/E ratio of 20% and uses the CAPM to estimate its cost of common equity, ks. The risk-free rate is 4.5 percent and the market risk premium is 6 percent. Flashtronics' current beta is 1.3. On the basis of this information, what is Flashtronics' optimal capital structure, and what is the firm's weighted average cost of capital (WACC) at this optimal capital structure? You must show the WACC at each debt level. (6 pts.)

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