Feldspar Inc ?
Based on This Information, What Capital Structure (Debt/asset Ratio)

question 63

Multiple Choice

Feldspar Inc. is considering the capital structure for a new division. Management has been given the following cost information: $\begin{array}{lll}\text { Debt/assets } &\mathrm{k}_{d} \text { (Cost of Debt) }& \mathrm{k}_{\mathrm{e}} \text { (Cost of Equity) }\\.30 & .10 & .125 \\.40 & .105 & .13 \\.50 & .11 & .135 \\.60 & .117 & .142 \\.70 & .13 & .155\end{array}$
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Based on this information, what capital structure (debt/asset ratio) should management accept? Assume the marginal tax rate is 40%.

• A) 40% has lowest cost of capital
• B) 50% has lowest cost of capital
• C) 60% has lowest cost of capital
• D) 70% has lowest cost of capital

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Definitions:

Earnings Per Share

A measure of a company's profitability calculated by dividing its net income by the number of its outstanding shares.

Stock Splits

An action by a company to divide its existing shares into multiple ones to boost the stock's liquidity, though the company's overall market value stays the same.

Earnings Per Share

A company's net profit divided by the number of its outstanding shares, indicating the amount of money each share would receive if all profits were distributed.