a. Given the following, determine the firm's optimal capital structure: Debt/Assets 0% 10 20 30 40 50 60 After-Tax Cost of Debt 6% 7 7 7 9 10 13 Round your answers for capital structure to the nearest whole number and for the cost of capital to one decimal place. The optimal capital structure: * % debt and % equity with a cost of capital of b. If the firm were using 40 percent debt and 60 percent equity, what would that tell you about the firm's use of financial leverage? Round your answer for the cost of capital to one decimal place. If the firm uses 40% debt financing, it would be using too much % Cost of Equity 11% 11 12 13 13 13 14 financial leverage. At that combination the cost of capital is than their required 11.0%. % of capital by substituting equity for debt v c. What two reasons explain why debt is cheaper than equity? Debt is cheaper than equity because interest expense is tax-deductible In addition, equity investors bear higher risk. d. If the firm were using 10 percent debt and 90 percent equity and earned a return of 9.7 percent on an investment, would this mean that stockholders would receive less than their required return of 11.0 percent? If the firm earns 9.7% on an investment, the stockholders will earn less What return would stockholders receive? Round your answer to one decimal place. X %. The firm could lower the cost

2. Given the following, determine the firm's optimal capital structure: Round your answers for capital structure to the neares whole oumber and for the cost of capital to one decimal place. The optimal capitsi structure: 8 Wh debt and 3\% equity with a cest of capital ef 3. place. If the firen uses 40 det financing, it would be using of capital by cubstituting financial leverage, At that combination the cost of capitat is 8 W. The firm could lower the cost. c. What two reatons explain why debe is cheaper then equar? Debt is cheaper than equity becaute interest expense In addation, equity ievestors bear 6 ritk. required retum of 11.0 percent? tf the firm earm 9.7% en on invistmene, the stockhelders wit earn What returh would stockhoiders receive? Giound your answer to one decimal place. than their reauired 11.0%