Question
Jersey Computer Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital
Jersey Computer Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure:
Proportion of debt | After-Tax Cost of Debt (ki) | Cost of Equity (ke) | ||||||
0.00 | 12.0 | % | ||||||
0.10 | 4.7 | % | 12.1 | |||||
0.20 | 4.9 | 12.5 | ||||||
0.30 | 5.1 | 13.0 | ||||||
0.40 | 5.5 | 13.9 | ||||||
0.50 | 6.1 | 15.0 | ||||||
0.60 | 7.5 | 17.0 |
Determine the firms optimal capital structure, assuming a marginal income tax rate (T) of 40 percent. The optimal capital structure is approximately -Select-0% debt and 100% equity10% debt and 90% equity20% debt and 80% equity30% debt and 70% equity40% debt and 60% equity50% debt and 50% equity60% debt and 40% equityItem 1 .
Suppose that the firms current capital structure consists of 30 percent debt (and 70% equity). How much higher is its weighted cost of capital than at the optimal capital structure? Round your answers to two decimal places. 30% debt and 70% equity: % Difference: %
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