Financing plans for a project are summarized below for Encore Productions.
(a) Using a spreadsheet, plot the WACC and indicate the D-E mix with the lowest WACC.
(b) Yesterday, the president of Angkor Bank, the bank that usually makes loans to Encore, informed the CFO that interest rates on all loans will increase by 1% per year immediately due to economic instability. Encore’s CFO does not want the WACC to exceed 9.9% for this project. Using a spreadsheet, update the rates for debt capital, determine the D-E mix with the lowest WACC, and determine for this specific D-E mix the percentage debt capital that must not be exceeded to ensure that the WACC is at 9.9%. Determine this maximum limit on debt capital using Goal Seek.
(a) Top part of the spreadsheet image indicates a D-E mix of 50%-50% to have the
lowest WACC at 9.7%. Graph is included.
(b) Lower image shows updated WACC values. D-E mix of 35%-65% has lowest WACC
of 10.19%. Row 27 is a repeat of the 35%-65% analysis. Goal Seek results in:
Maximum debt percentage of 10.15% to obtain WACC = 9.9%. The D-E mix is
10.15%-89.85%
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