Given the following, determine the firms optimal capital structure:

Debt/Assets		After-Tax Cost of Debt		Cost of Equity
0	%	6	%	10	%
10		6		10
20		6		10
30		6		10
40		7		13
50		8		14
60		10		14

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 %

If the firm were using 40 percent debt and 60 percent equity, what would that tell you about the firms 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 -Select-too muchtoo littleItem 4 financial leverage. At that combination the cost of capital is %. The firm could lower the cost of capital by substituting -Select-debt for equityequity for debtItem 6 .

What two reasons explain why debt is cheaper than equity?

Debt is cheaper than equity because interest expense -Select-is tax-deductibleis not tax-deductibleis always paid more frequentlyis not a legal obligationItem 7 . In addition, equity investors bear -Select-higherlowerItem 8 risk.

If the firm were using 30 percent debt and 70 percent equity and earned a return of 8.5 percent on an investment, would this mean that stockholders would receive less than their required return of 10.0 percent?

If the firm earns 8.5% on an investment, the stockholders will earn -Select-morelessItem 9 than their required 10.0%.

What return would stockholders receive? Round your answer to one decimal place.

%