Richmond Clinic has obtained the following estimates for its costs of debt and e

Question

Richmond 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%                                          17.0
40                   7.8                                              19.0
60                  10.2                                             22.0
80                  14.0                                              27.0

What is the firm's optimal capital structure? (Hint: Calculate its corporate cost of capital at each
structure. Also, note that data on component costs at alternative capital structures are not reliable in
real-world situations.

Explanation / Answer

What is the firm's optimal capital structure?

Optimal capital structure is 40% debt , after tax cost of debt =7.8 ,cost of equity = 19.0

Answer : Option C

Related Questions

Navigate

• Browse (All)
• Browse R
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.