Lucian Leasing is being formed to acquire a package of leases that will generate $42 million of before tax cashflows each year for the next 99 years. (For practical purposes, you can treat this as an infinite series of cash flows.) The cost of buying the leases is $150,000,000. The firm is considering various amounts of debt financing, as given in the following table:

Total Amount of Average Yield Common

Debt Raised on Debt Stock beta

0 - 0.50

$ 25,000,000 12.0% 0.60

50,000,000 13.0 0.75

75,000,000 14.0 1.00

100,000,000 16.0 1.40

125,000,000 20.0 2.00

The risk free rate is 10%, and the expected return on the market is 18%. The tax rate is 50%.

Required:

For each level of debt, compute the weighted average cost of capital and the total value of

the firm. What is the optimal capital structure?