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Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital

Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure. The companys income tax rate is 40 percent.

  1. Fill in the missing entries in the table. Round your answers to two decimal places.

    Debt ratio [B/B+E] Pre-tax cost of debt (kd) Cost of equity (ke) Weighted average cost of capital (ka)
    0.00 % 11.50%
    0.15 % 12.20 10.91
    0.30 7.00 14.00 %
    0.45 % 16.00 11.23
    13.00 17.70 11.76

  2. Use the completed table to determine the capital structure (that is, debt ratio) that minimizes the firms weighted average cost of capital. % debt and % equity minimizes the firms weighted cost of capital.

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