1. Given the following information, what would be the optimal capital structure if the firms growth rate were 2%?

DEBT RATIO EXPECTED DIVIDENDS COST OF EQUITY

0% $5.00 11%

25% $6.00 12%

40% $6.50 13%

50% $7.00 14%

75% $7.50 15%

1. 0% debt, 100% equity
2. 25% debt, 75% equity
3. 50% debt, 50% equity
4. 75% debt, 25% equity