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28 Sep 2019
Hello Expert!
I am at the last week of my class and I do not feel these kind ofproblems have been explained well enough for me to understand them.I am in a crunch of course as it is due tomorrow. Would you be ableto help me out on this one? I appreciate any help you canoffer.
A firmâs current balance sheet is as follows:
Assets $100 Debt $10
Equity $90
A. What is the firmâs weighted-average cost of capital at variouscombinations of
debt and equity, given the following information?
Debt/Assets After-Tax Cost of Debt Cost of Equity Cost ofCapital
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 firmâsoptimal capital
structure. Compare this balance sheet with the firmâs currentbalance sheet.
What course of action should the firm take?
Assets $100 Debt $?
Equity $?
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?
Hello Expert!
I am at the last week of my class and I do not feel these kind ofproblems have been explained well enough for me to understand them.I am in a crunch of course as it is due tomorrow. Would you be ableto help me out on this one? I appreciate any help you canoffer.
A firmâs current balance sheet is as follows:
Assets $100 Debt $10
Equity $90
A. What is the firmâs weighted-average cost of capital at variouscombinations of
debt and equity, given the following information?
Debt/Assets After-Tax Cost of Debt Cost of Equity Cost ofCapital
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 firmâsoptimal capital
structure. Compare this balance sheet with the firmâs currentbalance sheet.
What course of action should the firm take?
Assets $100 Debt $?
Equity $?
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?
I am at the last week of my class and I do not feel these kind ofproblems have been explained well enough for me to understand them.I am in a crunch of course as it is due tomorrow. Would you be ableto help me out on this one? I appreciate any help you canoffer.
A firmâs current balance sheet is as follows:
Assets $100 Debt $10
Equity $90
A. What is the firmâs weighted-average cost of capital at variouscombinations of
debt and equity, given the following information?
Debt/Assets After-Tax Cost of Debt Cost of Equity Cost ofCapital
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 firmâsoptimal capital
structure. Compare this balance sheet with the firmâs currentbalance sheet.
What course of action should the firm take?
Assets $100 Debt $?
Equity $?
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?
Jamar FerryLv2
29 Sep 2019
