Given the following, determine the firms optimal capital structure: debt/asset cost of...
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Finance
Given the following, determine the firms optimal capital structure:
| debt/asset | cost of debt | cost of equity |
| 0% | 8% | 12% |
| 10% | 8% | 12% |
| 20% | 8% | 12% |
| 30% | 9% | 12% |
| 40% | 9% | 13% |
| 50% | 10% | 15% |
| 60% | 12% | 17% |
a) If the firm were using 60% debt and 40% equity, what would that tell you about the firms use of financial leverage? b) What 2 reasons explain why debt is cheaper than equity? c) If the firm were using 30% debt and 70% equity and earned a return of 11.7% on an investment, would this mean that stockholders would receive less than their required return of 12%? What return would the shareholders receive?
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