Purchase Solution

Optimal capital structure

Not what you're looking for?

Ask Custom Question

Jersey Computer Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure:

Proportion of Debt After-tax Cost Debt, ki After-tax Cost ofEquity, ke
0.00 - 12.0%
0.10 4.7% 12.1
0.20 4.9 12.5
0.30 5.1 13.0
0.40 5.5 13.9
0.50 6.1 15.0
0.60 7.5 17.0

a. Determine the firm's optimal capital structure, assuming a marginal income tax rate (T) of 40 percent.

b. Suppose that the firm's current capital structure consists of 30 percent debt (and 70 percent equity). How much higher is its weighted cost of capital than at the optimal capital structure?

Purchase this Solution

Solution Summary

The solution explains how to determine the optimal capital structure

Solution Preview

See attached file.

a. The optimal capital structure would be one that minimizes the weighted average cost of capital and so maximizes the value of firm. Given the proportions of debt, ...

Purchase this Solution


Free BrainMass Quizzes
Introduction to Finance

This quiz test introductory finance topics.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media