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A firm’s current balance sheet is as follows Assets $100 Debt $10Equity $90
What is the firm’s weighted-average cost of capital at variouscombinations of debt and equity, given the followinginformation?

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 ?

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Hubert Koch
Hubert KochLv2
28 Sep 2019

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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 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 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 firm’soptimal capital
structure. Compare this balance sheet with the firm’s 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?
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 at various combinations of debt and equity, given the following information?

Debt/Assets After-Tax Cost of Debt Cost of Equity 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's optimal capital structure. Compare this balance sheet with the firm's current balance sheet. What course of action should the firm take?

Assets $100 Debt $?

Equity $?

C.) As a firm initially substitutes debt for equity financing, what happens tot he cost of capital, and why?

D.) If a firm uses too much debt financing, why does the cost of capital rise?

Please be detailed in explaing the answer and show all the work please. Thank you for your help:-)

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