Biotec has estimated the costs of debt and equity capital for various proportions of debt in its capital structure: $\begin{array}{lll}\% \text { of Debt } & \text { Cost of Debt }(\%) &\text { Cost of Equity }(\%)\
35 & 5.4 & 13.8 \
40 & 5.6 & 14.0 \
45 & 5.9 & 14.3 \
50 & 6.4 & 14.7
\end{array}$
Based on these estimates, determine Biotec's optimal capital structure.

Question

Quizplus · Accepted Answer

The optimal capital structure is the one that minimizes the weighted average cost of capital (WACC). The WACC is calculated as follows:WACC = (Cost of Debt * % of Debt) + (Cost of Equity * % of Equity)For Biotec, the WACC for each proportion of debt is as follows:% of Debt	Cost of Debt (%)	Cost of Equity (%)	WACC35	5.4	13.8	9.2740	5.6	14.0	9.4445	5.9	14.3	9.7150	6.4	14.7	10.05As you can see, the WACC is minimized when the proportion of debt is 45%. Therefore, Biotec's optimal capital structure is 45% debt.

Biotec Has Estimated the Costs of Debt and Equity Capital