Optimal capital structure Bobby’s Beer Barn just paid a dividend of $1.06 and has seen their stock price rise to $27.48. However, they are attempting to purchase a new plant that needs capital of $1.5 million. This capital will come from common stock and bank debt. They have the following choices in terms of getting the capital:

If the firm uses option 1, the cost of debt is 5.87 % and the cost of equity is 6.10 %. The cost of equity is estimated based upon the capital asset pricing model assuming a market risk premium of 7.5 % and a risk-free rate of 1.5 %.
However, for every 20 % increase in debt (and resulting 20 % decrease in equity), the cost of debt increases by 1 %. Also, for every 20 % increase in debt, the firm’s beta increases by .4. This would then affect the cost of equity. Given a tax rate of 35 %, what is the optimal (of these four) capital structure?

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Option Wes Wpd (private debt) 1234 .80 .20 2 .60 .40 .40 .60 .20 .80