Clinic has obtained the following estimates for its costs of debt and equity at various capital structures:

Percent Debt After Tax Cost of Debt Cost of Equity

0 % - 16 %
20 6.6 % 17
40 7.8 19
60 10.2 22
80 14.0 27

What is the firm’s optimal capital Structure? (Hint: Calculate its corporate cost of capital at each structure. Also, note that data on component cost at alternative capital structure are not reliable in real world situation).

Question

Clinic has obtained the following estimates for its costs of debt and equity at various capital structures:

Percent Debt	After Tax Cost of Debt	Cost of Equity
		
0 %	-	16 %
20	6.6 %	17
40	7.8	19
60	10.2	22
80	14.0	27

What is the firm’s optimal capital Structure? (Hint: Calculate its corporate cost of capital at each structure. Also, note that data on component cost at alternative capital structure are not reliable in real world situation).

anonymous · Answer

Just calculate the WACC--the weighted average cost of capital for each weighting of debt. Then, choose the weight that minimizes the WACC.