L Corporation has total assets of P100 million. Earnings before interest and taxes were P20 million and the tax rate was 35%. Given the following leverage ratios and corresponding interest rates, calculate Litton's rate of return on equity for each amount of debt.

Leverage Interest on Debt

Debt/Total Assets

1. 0% -

2. 10 16%

3. 30 16

4. 50 18

5. 60 21

What is the optimal capital structure? If you were the finance manager, which capital structure would you choose? Explain.