Question

Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure.

						ke with Financial Distress Costs			ke with Financial
Debt fraction			ki			and Without Agency Costs			Costs and Agency Costs
	0.00			—			12.00	%		12.00	%
	0.10			4.8	%		12.05			12.05
	0.30			4.9			12.10			12.20
	0.40			5.0			12.20			12.60
	0.45			5.2			12.40			13.40
	0.50			5.7			12.80			14.80
	0.60			7.2			15.00			18.00

• Based on these data, the company’s optimal capital structure
  • with financial distress costs and without agency costs is at  ______% debt.
  • with financial distress and agency costs is at  _____ % debt.
• Suppose the company’s actual capital structure is 50 percent debt and 50 percent equity. How much higher is k_a at this capital structure than at the optimal value of k_a with financial distress and agency costs? Round your answer to two decimal places. ______%

Answer 1