Problem $22-10$

The financial manager has determined the following schedules for the cost of funds:

Debt ratio Cost of Debt Cost of Equity

$0\%3\%12\%$

$10312$

$20312$

$30312$

$40313$

$50514$

$60715$

Determine the firm$$s optimal capital structure. Round your answer to two decimal places.

The optimal capital structure consists of

$40$

$\%$ debt resulting in the cost of capital equal to

$\%.$

Construct a simple pro forma balance sheet that shows the firm$$s optimal combination of debt and equity for its current level of assets. Round your answers to the nearest dollar.

Balance Sheet

Assets $$600$ Debt $

Equity

$ $600$

An investment costs $$500$ and offers annual cash inflows of $$186$ for four years. Should the firm make the investment? Use Appendix D to answer the question. Round your answer to the nearest whole number.

The investment

should

be made since the internal rate of return that is

$\%$

exceeds

the cost of capital.

If the firm makes this additional investment, how should its balance sheet appear? Round your answers to the nearest dollar.

Balance Sheet

Assets $

Debt $

Equity

$

If the firm is operating with its optimal capital structure and a $$500$ asset yields $10\mathrm{.}0$ percent, what return will the stockholders earn on their investment in the asset? Round your answer to two decimal places.

$\%$