**Blue Ram Brewing Company Capital Structure Analysis**Blue Ram Brewing Company is assessing the impact of introducing debt into its capital structure to replace some of its equity. This analysis involves estimating how different debt levels could affect the company's costs of debt and equity, as well as its weighted average cost of capital (WACC).**Initial Conditions and Assumptions:**- **Unlevered Beta:** 1.1- **Cost of Equity (Unlevered):** 11.80%- **Weighted Average Cost of Capital (Initial):** 11.80%- **Risk-Free Rate of Interest:** 3% ($i_{RF}$)- **Market Risk Premium:** 8% (RP)- **Marginal Tax Rate:** 35%**Objective:**To understand the financial effects of varying levels of debt on Blue Ram's capital costs and overall WACC.**Analysis Overview:**| **D/Cap Ratio** | **E/Cap Ratio** | **D/E Ratio** | **Bond Rating** | **Before-Tax Cost of Debt ($r_d$)** | **Levered Beta ($b$)** | **Cost of Equity ($r_s$)** | **WACC** ||-----------------|-----------------|---------------|----------------|---------------------------------------|--------------------------|------------------------------|-----------|| 0.0 | 1.0 | 0.00 | — | — | 1.1 | 11.80% | 11.80% || 0.2 | 0.8 | 0.25 | A | 8.4% | — | 13.232% | 11.678% || 0.4 | 0.6 | 0.67 | BBB | 8.9% | 1.577 | 15.616% | 11.685% || 0.6 | 0.4 | 1.50 | BB | 11.1% | 2.173 | — | 12.483% || 0.8 | 0.2 | — | C | 14.3% | 3.960 | 34.680% | —

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The firm's unlevered beta is 1.1, and its cost of equity is 11.80%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 11.80%. The risk-free rate of interest (rRF) is 3%, and the market risk premium (RP) is 8%. Blue Ram's marginal tax rate is 35%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. D/Cap E/Cap Bond Before-Tax Cost of Levered Beta Cost of Equity ( Ratio Ratio D/E Ratio Rating Debt (ra) (b) rs) WACC 0.0 1.0 0.00 1.1 11.80% 11.80% 0.2 0.8 0.25 A 8.4% 13.232% 11.678% 0.4 0.6 0.67 BBB 8.9% 1.577 15.616% 0.6 0.4 1.50 BB 11.1% 2.173 12.483% 1200

The firm's unlevered beta is 1.1, and its cost of equity is 11.80%. Because the firm has no debt in its capital structure, its weighted average cost of capital (WACC) also equals 11.80%. The risk-free rate of interest (rRF) is 3%, and the market risk premium (RP) is 8%. Blue Ram's marginal tax rate is 35%. Blue Ram is examining how different levels of debt will affect its costs of debt and equity, as well as its WACC. The firm has collected the financial information that follows to analyze its weighted average cost of capital (WACC). Complete the following table. D/Cap E/Cap Bond Before-Tax Cost of Levered Beta Cost of Equity ( Ratio Ratio D/E Ratio Rating Debt (ra) (b) rs) WACC 0.0 1.0 0.00 1.1 11.80% 11.80% 0.2 0.8 0.25 A 8.4% 13.232% 11.678% 0.4 0.6 0.67 BBB 8.9% 1.577 15.616% 0.6 0.4 1.50 BB 11.1% 2.173 12.483% 1200

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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