A firm\'s current balance sheet is afollows: $10. Assets $100. DebtEquity $90. A
ID: 2770463 • Letter: A
Question
A firm's current balance sheet is afollows: $10.Assets $100. DebtEquity $90.
A. What is the firm's weighted-average cost of capital at variouscombination's of debt and equity, given the
following information? After-Tax
Debt/Assets Cost ofDebt Cost ofEquity Cost of Capital
0% 8% 12% ?
10 8 12 ?
20 8 12 ?
30 8 13 ?
40 9 14 ?
50 10 15 ?
60 12 16 ?
B. Construct a pro forma balance sheet that indicates the firm'soptimal capital structure. Compare this
balance sheet with the firm's current balance sheet. What course ofaction should the firm take?
Assets $100. DebtEquity ?
?
C. as a firm initially substitutes debt for equity financing, whathappens to the cost of capital, and why?
D. If a firm uses too much debt financing, why does the cost ofcapital rise?
Explanation / Answer
x.x
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