Feldspar Inc. is considering the capital structure for a new division. Management has been given the following cost information: Debt/assets kd(Cost of Debt) ke(Cost of Equity) .30 .10 .125 .40 .105 .13 .50 .11 .135 .60 .117 .142 .70 .13 .155 Based on this information, what capital structure (debt/asset ratio) should management accept? Assume the marginal tax rate is 40%. Hint: Cost of capital = Kd * (1-T) + Ke Group of answer choices 60% has lowest cost of capital 70% has lowest cost of capital 50% has lowest cost of capital 40% has lowest cost of capital
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should accept based on the given cost information, we will calculate the weighted average cost of capital (WACC) for each debt/assets ratio. The formula for WACC is: \[ WACC = Kd \times (1 - T) + Ke \] Where: - \(Kd\) is the cost of debt - \(T\) is the tax Show more…
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