U Question 17 Assume that your company is trying to determine its optimal capital structure, which consists only of debt and common stock. To estimate the cost of debt, the company has produced the following table: 5 pts Percent Financed With Debt 0.10 0.20 0.30 0.40 0.50 Percent Financed Debt Equity With Equity Ratio 0.90 0.10/0.90 = 0.11 0.80 0.2010.80 = 0.25 0.70 0.30/0.70 = 0.43 0.60 0.40/0 60 = 0.67 0.50 0.5010 50 = 100 Bond Before Tax Rating Cost Dett AA 7.0% A 72% A 8.0% 88% B 96% BB Now assume that the company's tax rate is 40 percent that the company uses the CAPM to estimate its cost of common equity Ky that the risk-free rate is 5 percent and the market risk premium is 6 percent. Finally assume that if it has no debt its WACC would be equal to its cost of equity which would be equal to 11 percent (you should now be able to determine its "unlevered beta." bu). Given this information, determine the firm's cost of capital if it finances with 40 percent debt and 60 percent equity 09.56% O 9.26% O 8.96% O 9.86% 10.16%