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Washington paper company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital
Washington paper company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure as follows. Determine the companys optimal capital structure.
| Tax rate | 40% |
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| Deb ratio | Pretax Cost | Cost of |
| After-tax Cost | Cost of |
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| B / (B+E) | of debt | Equity |
| of debt | Equity | WACC |
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| 0 | -- | 14.00% |
| ?? | ?? | ?? |
| 0.1 | 7.00% | 14.20% |
| ?? | ?? | ?? |
| 0.2 | 7.20% | 14.60% |
| ?? | ?? | ?? |
| 0.3 | 7.60% | 15.40% |
| ?? | ?? | ?? |
| 0.4 | 8.20% | 17.00% |
| ?? | ?? | ?? |
| 0.5 | 9.00% | 20.00% |
| ?? | ?? | ?? |
| 0.6 | 10.00% | 26.00% |
| ?? | ?? | ?? |
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