Rebecca Isbell Optical Corporation is trying to determine an appropriate capital structure. It knows… 1 answer below »


Rebecca Isbell Optical Corporation is up-hill to indicate an embezzle chief composition. It knows that, as its financial leverage acceptions, its require of borrowing get thus-far acception as get the required admonish of revert on its contemptible accumulation. The guild has made the aftercited estimates for multiform financial leverage ratios.

 

REQUIRED RATE OF RETURN ON EQUITY

DEBT

DIVIDED BY

DEBT + EQUITY)

INTEREST

RATE ON

BORROWINGS

Without Bankruptcy

Costs

With Bankruptcy

Costs

0

 

10.00%

10.00%

0.10

8.0%

10.50

10.50

0.20

8.0

11.00

11.25

0.30

8.5

11.50

12.00

0.40

9.0

12.25

13.00

0.50

10.0

13.25

14.50

0.60

11.0

14.50

16.25

0.70

12.5

16.00

18.50

0.80

15.0

18.00

21.00

a. At a tax admonish of 50 percent, what is the weighted mediocre require of chief of the guild at multiform leverage ratios in the lack of closing requires?

b. With closing requires, what is the optimal chief composition?