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Optimal capital structure to minimize cost of capital

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Starsburg electronics has never used debt, but the treasurer is considering a possible change in the capital structure. For now, assume that only two financing options are being considered for a firm that currently has $200,000 in total assets â?" remaining at zero percent debt (i.e. $200,000 equity) or shifting to $100,000 debt and $100,000 equity. The tax rate for the firm is 40% and interest rate on debt is 10%

(a) Complete the missing data in the tables below.
(b) As a treasurer, what conclusions or capital structure policies can you draw from these tables?

Please see attached table

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Solution Summary

By comparing EBIT and ROE of recession and strong economy, the leverage effect of debt issuance is shown in the table and optimal capital structure can be calculated.

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** Please see the attached file for the complete solution response **
Glad to help.

Option I: No debt ($200,000 equity)

Recession
Strong Economy
EBIT
-$60,000
$140,000
Less: Interest (12%)
0
0
=EBT
-$60,000
$140,000
Less: ...

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