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Amount of Debt Ratio Cost of Debt Price $0 0.00 $10.00 $200,000 0.20 10.00% $10.50 $400,000 0.40 11.00% $11.00 $600,000 0.60 14.00% $9.50 Provide answers

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Amount of Debt Ratio Cost of Debt Price $0 0.00 $10.00 $200,000 0.20 10.00% $10.50 $400,000 0.40 11.00% $11.00 $600,000 0.60 14.00% $9.50 Provide answers to the following questions: 1) By observation, what do you think is the firm's optimal capital structure? Why? 2) Determine the after-tax cost of debt (Ro), the after-tax cost of equity (Rs) and the weighted average cost of capital (WACC) at each potential leverage position fo the firm. Construct a graph which relates the computed after-tax capital costs to the respective leverage (debt-to-total asset) ratios. 3) Do the figures and/or the graph from question 2) confirm your answer provided in question 1)

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