FINANCE-Company ABC has estimated the costs of debt and equity capital

QUESTION

Company ABC
Company ABC has
estimated the costs of debt and equity capital for various proportions of debt
in its capital structure.

%
Debt After-tax cost of debt Cost of equity
0% – 13.0%
10 5.4% 13.3
20 5.4 13.8
30 5.8 14.4
40 6.3 15.2
50 7.0 16.0
60 8.2 17.0

Based on these estimates, determine Company ABC’s optimal
capital structure

ANSWER:

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