A Firm Is Analyzing Two Possible Capital Structures-30 and 50

Multiple Choice

A firm is analyzing two possible capital structures-30 and 50 percent debt ratios. The firm has total assets of $5,000,000 and common stock valued at $50 per share. The firm has a marginal tax rate of40 percent on ordinary income. If the interest rate on debt is 7 percent and 9 percent for the 30 percent and the 50 percent debt ratios, respectively, the amount of interest on the debt under each of the capital structures being considered would be

A) 30 percent debt ratio: $135,000 and 50 percent debt ratio: $175,000.
B) 30 percent debt ratio: $245,000 and 50 percent debt ratio: $225,000.
C) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $250,000.
D) 30 percent debt ratio: $105,000 and 50 percent debt ratio: $225,000.