Problem 21-04 The financai manoger of a firm determines the following schedules of cost of debt and cost of equity for various combinstions of debt finuncing: a. Ind the optimal capital structure (that is, eptimai combination of debt and equity finuncing). Roved your answers for the capital structure to the rearest whole number and for the cost of capital to one decimal place. The optimal coptal structure: Nobt and Sequity with e cost of capital of b. Why does the cost of capital initully decline as ine form ubsetutes debt for nouity financing? The cest of captal intally decines because the from cost of debt is than the cost of equity. Why will the cost of funds eventually rice as the firm becomes more financhety leveraged? As the firm becomes more financialif leveraged and nakier, the cost of debt and equaty will Why is debt finencing more commen than financing wath prefecred stock? and cause tre cost of copitai to increave. Debt financing is more common than financing with preferred stock becouse of stock. Which makes the cast of the ofot financing the cont of the preferred If hiterest were not o tax-deductible expense, what effect would thut have on the firms cont of capital? If interest were not a tax deductible, the cost of debt would be the cont of captal