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Suppose that Richmond Clinic has obtained the following estimates for its costs of debts and equity at various capital structures:
Debt (%) After-Tax cost of Debt (%) Cost of Equity (%)
0 - 16.0
20 6.6 17.0
40 7.8 19.0
60 10.2 22.0
80 14.0 27.0

What is the firm’s optimal capital structure? (Hint: Calculate its corporate cost of capital at each structure. Also, note that data on component costs at alternative capital structures are not reliable in real-world situations.)


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