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Question
Feldspar Inc. is considering the capital structure for a new division. Management has been given the following cost information:| Debt/assets | kd | ke | ||
| .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%.
a. 40% has lowest cost of capital
b. 50% has lowest cost of capital
c. 60% has lowest cost of capital
d. 70% has lowest cost of capital
Answer
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