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Question $7(1$ point$)$

As the debt to assets increases from $0\%$ to $100\%,$ the cost of debt financing can be estimated with the following function:

$1\%+(\frac{1}{3})(\%$ debt ${)}^2$

Use the same function for the cost of equity $($change out the $\%$debt for the $\%$equity in the equation$)$ and a tax rate of $30\%,$ with a dividend payout ratio of $60\%$ and an EPS of $$2\mathrm{.}50.$ There are no preferred shares.

Make a table of debt to assets with the cost of debt, the after tax cost of debt, and the cost of equity $($use each $10\%$ level of debt from $10\%$ to $90\%).$ Graph these $3$ functions.

Set up an equation for the WACC and use the Solver function in Excel to find the minimum cost of capital.

Enter all answers in percent with no $"\%"($i$.$e$.21\mathrm{.}4\%=21\mathrm{.}4),$ one decimal place is sufficient since there is a wide tolerance for numeric answers.

At what level of debt is the minimum cost of capital?

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