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1.    The following information obtained from EAST AFRICA HOLDINGS

financial data base. At the end of 2016 the company free cash flow is $40 million. And this will continue for unlimited period of time with zero growth rates. At this time the company capital source was the existing common stock holders. The unleveraged beta of the industry is 1.20. But with deep analysis of the industry the finance sub team convinced the requirement of outside source to sustain a business. Therefore if the company determines to procure capital from debt and to leverage the industry what is the optimum capital structure of the industry? given:
a.    The experts projected cost of debt is 7%.
b.    Stock free risk rate of the industry was 6.5% and the market risk premium considered was 5%.
c.     marginal tax is 40%
Hit: consider 10/90, 40/60 and 50/50 percent debt /equity ratio as possible optimum capital structure options. 

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