a. Given the following, determine the firms optimal capital structure: b. If the firm were using 60

a. Given the following, determine the firm’s optimal capital structure:

b. If the firm were using 60 percent debt and 40 percent equity, what would that tell you about the firm’s use of financial leverage?
c. What two reasons explain why debt is cheaper than equity?
d. If the firm were using 30 percent debt and 70 percent equity and earned a return of 11.7 percent on an investment, would this mean that stock holders would receive less than their required return of 12 percent?
What return would stockholders receive?

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Debt/Assets After-Tax Cost of Debt Cost of Equity 0% 10 20 30 40 50 60 8% 12% 12 12 12 13 15 17 10 12