The financial manager has determined the following schedules for the cost of funds:
Cost of debt ratio Cost of debt Equity
0% 5% 13%
10% 5% 13%
20% 5% 13%
30% 5% 13%
40% 5% 14%
50% 6% 15%
60% 8% 16%
a. Determine the firm's optimal capital structure.
b. Construct a simple pro formula balance sheet that shows the firms optimal combination of debt equity for its current level of assets.