Determine the companys optimal capital structure

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Reference no: EM13927395

Washington Paper Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure as follows:

Debt Ratio [B/(B + E)] Pretax Cost of Debt (kd) Cost of Equity (ke)

0.00 - 14.0%

0.10 7.0% 14.2

0.20 7.2 14.6

0.30 7.6 15.4

0.40 8.2 17.0

0.50 9.0 20.0

0.60 10.0 26.0

The firm's marginal (and average) income tax rate is 40 percent. Determine the company's optimal capital structure.

Reference no: EM13927395

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