The financial manager has determined the following schedules for the cost of funds:

Debt ratio		Cost of Debt		Cost of Equity
0%		5%		15%
10		5		15
20		5		15
30		5		15
40		5		16
50		6		17
60		8		18

a) Determine the firm’s optimal capital structure. Round your answer to two decimal places.

The optimal capital structure consists of _____(0/10/20/30/40/50/60)% debt resulting in the cost of capital equal to _____%.

b) Construct a simple pro forma balance sheet that shows the firm’s optimal combination of debt and equity for its current level of assets. Round your answers to the nearest dollar.

Balance Sheet
Assets	$400		Debt	$_____
			Equity	_____
				$	400

c) An investment costs $400 and offers annual cash inflows of $133 for five years. Should the firm make the investment? Use Appendix D to answer the question. Round your answer to the nearest whole number.

The investment _____(should/should not) be made since the internal rate of return that is _____% _____(exceeds/is lower than) the cost of capital.

d) If the firm makes this additional investment, how should its balance sheet appear? Round your answers to the nearest dollar.

Balance Sheet
Assets	$_______		Debt	$______
			Equity	_______
				$______

e) If the firm is operating with its optimal capital structure and a $400 asset yields 10.0 percent, what return will the stockholders earn on their investment in the asset? Round your answer to two decimal places.

_____%

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Time Period (e.g., Interest Factors for the Present Value of an Annuity of One Dollar APPENDIX D 12345 year) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 18% 20% 24% 28% 32% 36% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.877 0.862 0.847 0.833 0.806 0.781 0.758 0.735 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.690 1.647 1.605 1.566 1.528 1.457 1.392 1.332 1.276 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.402 2.322 2.246 2.174 2.106 1.981 1.868 1.766 1.674 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.037 2.914 2.798 2.690 2.589 2.404 2.241 2.096 1.966 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.605 3.433 3.274 3.127 2.991 2.745 2.532 2.345 2.181 5.795 5.601 5.417 5.242 5.076 4.917 4.766 4.623 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 7 68819 4.486 4.355 4.111 3.889 3.685 3.498 3.326 3.020 2.759 2.534 2.399 5.033 4.868 4.564 4.288 4.039 3.812 3.605 3.242 2.937 2.678 2.455 5.535 5.335 4.968 4.639 4.344 4.078 3.837 3.421 3.076 2.786 2.540 5.985 5.759 5.328 4.946 4.607 4.303 4.031 3.566 3.184 2.868 2.603 6.418 6.145 5.650 5.216 4.833 4.494 4.193 3.682 3.269 2.930 2.650 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 5.988 5.453 5.029 4.656 4.327 3.776 3.335 2.978 2.683 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.194 5.660 5.197 4.793 4.439 3.851 3.387 3.013 2.708 13 12.134 11.348 10.635 9.986 9.394 8.534 8.358 7.904 7.487 7.103 6.424 5.842 5.342 4.910 4.533 3.912 3.427 3.040 2.727 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.628 6.002 5.468 5.008 4.611 3.962 3.459 3.061 2.740 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.060 7.606 6.811 6.142 5.575 5.092 4.675 4.001 3.483 3.076 2.750 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 8.312 7.824 6.974 6.265 5.669 5.162 4.730 4.003 3.503 3.088 2.758 8.544 8.002 7.120 6.373 5.749 5.222 4.775 4.059 3.518 3.097 2.763 8.756 8.201 7.250 6.467 5.818 5.273 4.812 4.080 3.529 3.104 2.767 8.950 8.365 7.366 6.550 5.877 5.316 4.844 4.097 3.539 3.109 2.770 9.128 8.514 7.469 6.623 5.929 5.353 4.870 4.110 3.546 3.113 2.772 25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077 7.843 6.873 6.097 5.467 4.948 4.147 3.564 3.122 2.776 30 25.808 22.937 19.600 17.292 15.373 13.765 12.409 11.258 10.274 9.427 8.055 7.003 6.177 5.517 4.979 4.160 3.569 3.124 2.778 Time Period (e.g., Interest Factors for the Present Value of an Annuity of One Dollar APPENDIX D 12345 year) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 12% 14% 16% 18% 20% 24% 28% 32% 36% 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.893 0.877 0.862 0.847 0.833 0.806 0.781 0.758 0.735 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.690 1.647 1.605 1.566 1.528 1.457 1.392 1.332 1.276 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.402 2.322 2.246 2.174 2.106 1.981 1.868 1.766 1.674 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.037 2.914 2.798 2.690 2.589 2.404 2.241 2.096 1.966 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.605 3.433 3.274 3.127 2.991 2.745 2.532 2.345 2.181 5.795 5.601 5.417 5.242 5.076 4.917 4.766 4.623 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 7 68819 4.486 4.355 4.111 3.889 3.685 3.498 3.326 3.020 2.759 2.534 2.399 5.033 4.868 4.564 4.288 4.039 3.812 3.605 3.242 2.937 2.678 2.455 5.535 5.335 4.968 4.639 4.344 4.078 3.837 3.421 3.076 2.786 2.540 5.985 5.759 5.328 4.946 4.607 4.303 4.031 3.566 3.184 2.868 2.603 6.418 6.145 5.650 5.216 4.833 4.494 4.193 3.682 3.269 2.930 2.650 11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 5.988 5.453 5.029 4.656 4.327 3.776 3.335 2.978 2.683 12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.194 5.660 5.197 4.793 4.439 3.851 3.387 3.013 2.708 13 12.134 11.348 10.635 9.986 9.394 8.534 8.358 7.904 7.487 7.103 6.424 5.842 5.342 4.910 4.533 3.912 3.427 3.040 2.727 14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.628 6.002 5.468 5.008 4.611 3.962 3.459 3.061 2.740 15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.060 7.606 6.811 6.142 5.575 5.092 4.675 4.001 3.483 3.076 2.750 16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 8.312 7.824 6.974 6.265 5.669 5.162 4.730 4.003 3.503 3.088 2.758 8.544 8.002 7.120 6.373 5.749 5.222 4.775 4.059 3.518 3.097 2.763 8.756 8.201 7.250 6.467 5.818 5.273 4.812 4.080 3.529 3.104 2.767 8.950 8.365 7.366 6.550 5.877 5.316 4.844 4.097 3.539 3.109 2.770 9.128 8.514 7.469 6.623 5.929 5.353 4.870 4.110 3.546 3.113 2.772 25 22.023 19.523 17.413 15.622 14.094 12.783 11.654 10.675 9.823 9.077 7.843 6.873 6.097 5.467 4.948 4.147 3.564 3.122 2.776 30 25.808 22.937 19.600 17.292 15.373 13.765 12.409 11.258 10.274 9.427 8.055 7.003 6.177 5.517 4.979 4.160 3.569 3.124 2.778