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December 7th, 2012, 08:23 AM   #1
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Optimal capital structure need help

Company Y requires 10 million capital. The rate of interest on debt is 10% and the tax rate is 40%. What is the optimal percentage of debt, when the model stating the negative value of financial distress V = I*A*X^2 ( where I is the total amount of investment, A is a constant which in this case is 0,05 and X is the proportion of the investment financed through debt) applies? So the model V estimates the monetary impact of financial distress caused by high proportion of leverage used by a company.

I'm not sure how to begin solving this. I tried making a formula for WACC and attempted to minimize it but didn't get a reasonable answer.

Please help I'm clueless here
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