Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure The companys income tax rate is 40 percent a Fill in the missing entries in the table b Determine the capital structure (i e , debt ra...

a Debt ratio Pretax cost Cost of equity Weighted averag ...

Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs)

Question:

Colorado Coal Company has estimated the costs of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure.

Weighted Average Cost of Capital ka 12.0% Debt Ratio Cost of Equity (k.) Pretax Cost [B/(B + E)) of Debt (ka) 0.00 13.0

The company’s income tax rate is 40 percent.

a. Fill in the missing entries in the table.

b. Determine the capital structure (i.e., debt ratio) that minimizes the firm’s weighted average cost of capital.

Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a...