Aswath Damodaran 352
Aracruz’s Optimal Debt Ratio
Debt
Ratio Beta
Cost of
Equity
Bond
Rating
Interest
rate on
debt
Tax
Rate
Cost of
Debt
(after-
tax) WACC
Firm
Value
in BR
0 % 0. 54 10. 80 % AAA 6. 10 % 34. 00 % 4. 03 % 10. 80 % 12 , 364
10 % 0. 58 11. 29 % AAA 6. 10 % 34. 00 % 4. 03 % 10. 57 % 12 , 794
20 % 0. 63 11. 92 % A 6. 60 % 34. 00 % 4. 36 % 10. 40 % 13 , 118
30 % 0. 70 12. 72 % BBB 7. 25 % 34. 00 % 4. 79 % 10. 34 % 13 , 256
40 % 0. 78 13. 78 % CCC 13. 75 % 34. 00 % 9. 08 % 11. 90 % 10 , 633
50 % 0. 93 15. 57 % CCC 13. 75 % 29. 66 % 9. 67 % 12. 62 % 9 , 743
60 % 1. 20 19. 04 % C 17. 75 % 19. 15 % 14. 35 % 16. 23 % 6 , 872
70 % 1. 61 24. 05 % C 17. 75 % 16. 41 % 14. 84 % 17. 60 % 6 , 177
80 % 2. 41 34. 07 % C 17. 75 % 14. 36 % 15. 20 % 18. 98 % 5 , 610
90 % 4. 82 64. 14 % C 17. 75 % 12. 77 % 15. 48 % 20. 35 % 5 , 138
This is the optimal debt ratio with normalized operating income. The costs of
equity and capital are computed in US dollar terms. The optimal debt ratio is
30%, which is about where they are right now.
