Griffin Ross Construction Inc. (GRC) builds upscale homes in several New England cities. The firm is subject to the ups and downs of the construction industry and has a historical beta of 2.1. GRC has traditionally operated with a capital structure of approximately 20% debt and 80% equity. The owner Griffin Ross, is interested in selling the business, and has hired you to look at approaches to enhancing its market value. You think overall value might increase if the firm operated at its optimal capital structure, but you don't know what that optimal level is.

A commercial banker has given you the following estimate of the rates that GRC could borrow depending on its level of leverage

GRC is subject to a total effective tax rate of 35%, the risk free rate is 5% and the market is returning 11%, i.e. the market risk premium is 6%.
Calculate GRC's cost of equity, ke, as well as its average cost of capital, ka (WACC), as functions of leverage where leverage, measured by debt as a percent of total capital, varies from 0% to 70% in 10% increments. Use the result to estimate GRC's optimal capital structure.

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