Optimal capital structure. You are in charge of the finance department at Johnny’s Kawasaki, Inc. The firm is considering expanding to Europe and will build a plant in London. The plant will cost approximately $14 million.

Your duty is to identify the optimal capital structure with which to pay for the $14 million dollar project. After months of work, you have identified the following data.

In addition, the expected return on the market is 9% and the risk-free rate is 3%. Your tax rate is 21%

(a) Of these options, which capital structure is best?

(b) Given the optimal capital structure, how much will obtaining this $14 M in funding cost the firm?

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Option If you have debt of.... ...you will have... Cost of debt Beta 1 2 $2 million 6.67% 0.76 $5 million 7.25% 0.81 3 $7 million 8.19% 0.92 4 $10 million 9.65% 0.98