Colorado coal company has estimated the cost of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure. the company’s income tax rate is 40 percent.

a. fill in the missing entries in the table.

debt ratio pretax cost of debt cost of equity weighed average cost of capital

o. oo 12.0%

0.15 13.0 11.68%

0.30 8.0 14.5

0.45 16.5 11.775

14.0 19.0 12.64

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