Final answer:
The question explores how businesses determine their optimal capital structure by estimating the cost of debt and equity at various levels of debt financing, and how societal benefits of investment may affect those calculations.
Step-by-step explanation:
The question pertains to the cost of capital in relation to debt-equity mix in a company's capital structure. It specifically talks about how a company, such as Jersey Computer Company, estimates the costs associated with various proportions of debt in its overall capital. Additionally, it introduces another scenario where the Gizmo Company contemplates how its investment with an expected certain percentage of return would also contribute a social benefit, effectively increasing the total return by an additional 5% for society.
For instance, if a firm has a 9% interest rate for debt and can capture an additional 5% return for society, the effective cost of capital from the firm's perspective would be reduced by this societal benefit, thereby influencing their investment decisions, such as investing $183 million when the effective rate of return appears to be 4% after considering the social benefit.
Businesses use these calculations to determine their optimal capital structure, balancing between the cost of debt (interest payments) and the cost of equity (equity investor expectations), to maximize value for shareholders while considering societal impacts.