Feldspar Inc. is considering the capital structure for a new division. Management has been given the following cost information: Debt/assets kd(Cost of Debt) ke(Cost of Equity) .30 .10 .125 .40 .105 .13 .50 .11 .135 .60 .117 .142 .70 .13 .155 Based on this information, what capital structure (debt/asset ratio) should management accept? Assume the marginal tax rate is 40%.

Answer

a. 70% has lowest cost of capital

b. 50% has lowest cost of capital

c. 60% has lowest cost of capital

d. 40% has lowest cost of capital