Given the following schedules,(8 pts total)

debt/assetscost ofcost of

debtequity

0%7%14%

10714

20714

30814

40816

501018

601220

1. what is firm's cost of capital at the various combinations of debt and equity?(2 pts.)

2. What is the firm's optimal capital structure? Construct a balance sheet like below showing that combination of debt and equity financing.(2 pts.)

Balance Sheet for Firm X as of XX/XX/XX

Assets$100Debt

Equity________________

$100

3. If the firm earns $10 on every $100 of assets, will the stockholders receive more or less than their required rate of return if the firm uses its optimal combination of debt and equity financing?(1.5 pt.)

4. If the above cost of equity is the cost of retained earnings,what happens to the cost of capital if the cost of new shares is one percentage point higher at the firm's optimal capital structure?(1.5 pt.)

5. If the firm has retained earnings of $1,500,000, what is the cost of capital at the optimal capital structure if the firm needs $2,000,000?(1 pt.)