Nakatomi Trading Corp. (NTC) builds upscale homes in several New England cities. The firm is subject to the ups and downs of the construction industry and has a historical beta of 1.7. NTC has traditionally operated with a capital structure of approximately 20% debt and 80% equity. The owner, Griffin Ross, is interested in selling the business and has hired you to look at approaches to enhancing its market value. You think overall value might increase if the firm operated at its optimal capital structure, but you don't know what that optimal level is.

A commercial banker has given you the following estimate of the rates that NTC could borrow depending on its level of leverage.

% Debt 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

k_d 6% 6.5% 7% 8% 10% 12% 15% 19% N/A N/A

NTC is subject to a total effective tax rate of 40%, the risk-free rate is 6%, and the market is returning 10%that is, the market risk premium (k_M k_RF) is 4%.

Calculate NTC's cost of equity, k_e, as well as its average cost of capital, k_a(WACC), as functions of leverage where leverage, measured by debt as a percent of total capital, varies from 0% to 70% in 10% increments. Round your answers and b_uvalue to two decimal places. Do not round any other intermediate calculations. Enter numbers only, without "%".(Hint: The NTC's beta is levered at a 20/80 debt/equity level. Begin by calculating the unlevered beta.)

% Debt 0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

k_d 6% 6.5% 7% 8% 10% 12% 15% 19% N/A N/A

k_{e __________ _________ ________ ________ ________ ________ _________ _______ ________ _________ 20.21}

k_{a __________ _________ ________ ________ __________ _________ __________ ________ _________ __________ 14.04}

Use the results for k_ato estimate NTC's optimal capital structure. Round the answers to the nearest whole percentage (enter numbers only, without "%").

The optimum capital structure is in the neighborhood of _________________% debt and _____________% equity.