Washington Paper Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs)

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Washington Paper Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure as follows:

Debt Ratio [B/(B + E)]
Pretax Cost of Debt (kd)
Cost of Equity (ke)
0.00 — 14.0%
0.10 7.0% 14.2 0.20 7.2 14.6 0.30 7.6 15.4 0.40 8.2 17.0 0.50 9.0 20.0 0.60 10.0 26.0 The firm’s marginal (and average) income tax rate is 40 percent. Determine the company’s optimal capital structure. L0358

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