Piedmont Instruments Corporation has estimated the following costs of debt and equity capital for various fractions of debt in its capital structure.
Debt Fraction kike with Financial Distress Costs and Without Agency Costs ke with Financial Distress 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 7.0 15.00 18.00
a. Based on these data, determine the company's optimal capital structure
(i) with financial distress costs and without agency costs and (ii) withfinancial distress and agency costs.
b. Suppose the company's actual capital structure is 50 percent debt and 50 percent equity. How much higher is ka at this capital structure than at the optimal value of ka with financial distress and agency costs?
c. Is it necessary in practice for the company to know precisely its optimal capital structure? Why?