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Please i need solution in 40 minutes thanks Question 1: Rebecca Isbell Optical Corporation is trying to determine an appropriate capital structure. It knows that,
Please i need solution in 40 minutes thanks
Question 1: Rebecca Isbell Optical Corporation is trying to determine an appropriate capital structure. It knows that, as its financial leverage increases, its cost of borrowing will eventually increase as will the required rate of return on its common stock. The company has made the following estimates for various financial leverage ratios. DEBT INTEREST REQUIRED RATE OF RETURN ON EQUITY DIVIDED BY RATE ON WITHOUT BANKRUPTCY WITH BANKRUPTCY (DEBT + EQUITY) BORROWINGS COSTS COSTS 0 10.00% 10.00% 0.10 8.0% 10.50 10.50 0.20 3.0 11.00 11.25 0.30 8.5 11.50 12.00 0.40 9.0 12.25 13.00 0.50 10,0 13.25 14.50 0.60 110 14.50 16.25 0.70 12.5 16,00 18.50 0.80 15.0 18.00 21.00 a. At a tax rate of 5 percent, what is the weighted average cost of capital of the company at various leverage ratios in the presence of bankruptcy costs? (10) b. Explain optimal capital structure? What is optimal capital structure of this companyStep by Step Solution
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