Background:
• Reference Brigham, Eugene F., and Ehrhardt, Michael, C., Financial Management, Theory and Practice, 14th Edition (2013). Chapter 15, Formula (15-2, p. 591), Hamada equations (15-9, 15-10, pp.610-611), & the process described on pages 608 through 614, plus graph on page 612 (Figure 15-7) are the “keys” to trying to determine the “optimal WACC.”
• The precise identification of the firm’s optimal capitalization structure is difficult, and depends a great deal on judgment of corporate officials and investment experts, as well as on the quality of data used in numerical calculations. Bottom-line is: only your study team can possibly know the “optimal WACC” for your selected company…and, it may not make that much of a difference in maximization of stockholder wealth from today’s “target WACC.”
Assumptions/”Givens”
• For the purpose of the project, assume no preferred stock.
• Similar to the textbook on pages 608-611, we will assume a zero percent (0.0%) growth rate in your company. (Otherwise, you will have to figure out future capital investments, and make adjustments in the “free cash flow (FCF)” calculations).