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rubycamel31Lv1
28 Sep 2019
A firm's current balance sheet is as follows:
Assets $100 Debt $10
Equity $90
(a) What is the firm's weighted-average cost of capital atvariouscombinations of debt and equity, given thefollowinginformation?
Debt/Assets After-Tax Cost ofdebt Cost ofEquity 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 thefirm'soptimal capital structure. Compare this balance sheet withthefirm's current balance.
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 costofcapital rise?
A firm's current balance sheet is as follows:
Assets $100 Debt $10
Equity $90
(a) What is the firm's weighted-average cost of capital atvariouscombinations of debt and equity, given thefollowinginformation?
Debt/Assets After-Tax Cost ofdebt Cost ofEquity 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 thefirm'soptimal capital structure. Compare this balance sheet withthefirm's current balance.
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 costofcapital rise?
Assets $100 Debt $10
Equity $90
(a) What is the firm's weighted-average cost of capital atvariouscombinations of debt and equity, given thefollowinginformation?
Debt/Assets After-Tax Cost ofdebt Cost ofEquity 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 thefirm'soptimal capital structure. Compare this balance sheet withthefirm's current balance.
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 costofcapital rise?
Lelia LubowitzLv2
28 Sep 2019
