Problem
Alcon Ltd is a private company providing refrigeration services to large shopping centres. The following table shows how their cost of equity and effective cost of debt is affected by the percentage of the debt. The Board of Directors does not have the information on the WACC column.
|
Proportion of Debt
|
Debt-to-Equity
|
Cost of Equity
|
Effective Cost of Debt
|
Cost of Financial Distress
|
WACC
|
|
0%
|
0
|
10%
|
4.6%
|
|
??
|
|
10%
|
0.11
|
11%
|
4.6%
|
|
??
|
|
20%
|
0.25
|
12%
|
4.6%
|
|
??
|
|
30%
|
0.43
|
13%
|
4.6%
|
|
??
|
|
40%
|
0.67
|
14%
|
4.6%
|
|
??
|
|
50%
|
1.00
|
15%
|
4.6%
|
|
??
|
|
60%
|
1.50
|
16%
|
4.6%
|
|
??
|
|
70%
|
2.30
|
17%
|
4.8%
|
1%
|
??
|
|
80%
|
4.00
|
18%
|
5.2%
|
3%
|
??
|
|
90%
|
9.00
|
19%
|
6.1%
|
9%
|
??
|
|
100%
|
|
|
7.0%
|
14%
|
??
|
Task: What is the current WACC and optimal WACC for the business?