Foulke Enterprises has no debt, and is financed with 100 percent equity. The firm's marginal tax rate is 40 percent. However, Foulke's CFO is looking into restructuring the firm with some debt. He has estimated the costs of common equity and debt if Foulke raises varying amounts of capital as shown below:
If Foulke wants to maximize the firm's value by operating at its optimal capital structure, what debt ratio should it achieve?
A) 20%
B) 30%
C) 40%
D) 50%
E) 60%

Question

Foulke Enterprises has no debt, and is financed with 100 percent equity. The firm's marginal tax rate is 40 percent. However, Foulke's CFO is looking into restructuring the firm with some debt. He has estimated the costs of common equity and debt if Foulke raises varying amounts of capital as shown below:
 If Foulke wants to maximize the firm's value by operating at its optimal capital structure, what debt ratio should it achieve?
A) 20% 
B) 30% 
C) 40% 
D) 50% 
E) 60%

Quizplus · Accepted Answer

The Answer of Foulke Enterprises has no debt, and is financed with 100 percent equity. The firm's marginal tax rate is 40 percent. However, Foulke's CFO is looking into restructuring the firm with some debt. He has estimated the costs of common equity and debt if Foulke raises varying amounts of capital as shown below:
 If Foulke wants to maximize the firm's value by operating at its optimal capital structure, what debt ratio should it achieve?
A) 20% 
B) 30% 
C) 40% 
D) 50% 
E) 60%

Foulke Enterprises Has No Debt, and Is Financed with 100