From Scenario 3, evaluate King Fisher's target capital structure. What are your recommendations? Consider the impact of taxes and explain your reasoning.

1.

Stock A	Probability	Return	Product	Return Deviation	Squared Deviation	Product
Recession	0.25	0.05	1.25%	-175.00%	3.0625	7.6563E-05
Normal	0.50	0.06	3.00%	-0.75%	0.00005625	0.00002813
Boom	0.25	0.10	2.50%	3.25%	0.00105625	0.00026406
		E(R) =	6.75%		Variance =	0.00037
	Standard Deviation	1.92%
Stock B	Probability	Return	Product	Return Deviation	Squared Deviation	Product
Recession	0.25	(0.19)	-4.75%	(29.7500)	885.06250	0.02212656
Normal	0.50	0.14	7.00%	3.2500	10.5625	0.00052813
Boom	0.25	0.34	8.50%	23.2500	540.56250	0.01351406
		E(R) =	10.75%		Variance =	0.03617
	Standard Deviation	19.02%

2.

State	Probability	Stock A
Depression	0.15	-0.107
Recession	0.20	0.069
Normal	0.40	0.135
Boom	0.25	0.215
Output area:
Stock A	Probability	Return	Product	Return Deviation	Squared Deviation	Product
Depression	0.15	-0.107	(0.0161)	0.12155	0.0147744	0.00295488
Recession	0.20	0.069	0.0138	(0.0917)	0.00840889	0.00168178
Normal	0.40	0.135	0.0540	(0.0515)	0.00265225	0.0010609
Boom	0.25	0.215	0.0538	(0.0518)	0.00267806	0.00066952
		E(R) =	0.1055		Variance =	0.00636707
	Standard Deviation	7.98%

3.

Stock E(R)	12.40%
Stock beta	1.32
Market E(R)	10.00%
Output area:
	12.4% = rf+1.37*(10%-rf)
Risk-free	3.51%

4.

Common stock	72%
Debt	28%
Cost of equity	12%
Cost of debt	5%
Tax rate	40%
Output Area:
WACC	9.48%

5.

	Input Area:
	Settlement	01/01/00
	Maturity	01/01/17
	Price (% of par)	110
	Coupon rate	6.80%
	Payments per year	2
	Tax rate	40%
	Output Area:
a.	Pretax cost of debt	5.86%
b.	Aftertax cost of debt	3.52%
c.	Which is more relevant, the pretax or the after-tax cost of debt and why?	after tax cost of debt is most relevant as it is used WACC and capital budget decisions