Jersey Computer Company has estimated the costs of debt and equity capital (with bankruptcy and agency...
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 of Debt (ki) | Cost of Equity (ke) | ||||||
| 0.00 | — | 8.0 | % | |||||
| 0.10 | 4.7 | % | 8.1 | |||||
| 0.20 | 5.4 | 8.7 | ||||||
| 0.30 | 5.8 | 9.3 | ||||||
| 0.40 | 6.4 | 9.8 | ||||||
| 0.50 | 6.9 | 10.4 | ||||||
| 0.60 | 7.1 | 11.8 | ||||||
Determine the firm’s optimal capital structure, assuming a marginal income tax rate (T) of 40 percent.
What is the WACC of the optimal capital structure? 10.12% should be entered as 10.12
Suppose that the firm’s current capital structure consists of 30 percent debt (and 70% equity).
How much higher is its weighted cost of capital than at the optimal capital structure? Round your answers to two decimal places.10.12% should be entered as 10.12
Hint: you subtract the two WACCs.
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Jersey Computer Company has estimated the costs of debt and
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