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15 Jul 2019

Which one of the following terms is defined as the mixture of a firm's debt and equity financing?

working capital management

cash management

cost analysis

capital budgeting

capital structure

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Reid Wolff
Reid WolffLv2
16 Jul 2019

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1. Corporate finance has three main areas of concern:

a. Capital Budgeting: What long-term investments should the firm take?

b. Capital structure: Where will the firm get the long-term financing to pay for its investments? Also,

what mixture of debt and equity should it used to fund operations?

c. Working capital management: How should the firm manage its everyday financial activities?

Explain how management decisions on capital structure, capital budgeting problems, and working capital affect achieving the goal of financial management. Give one example of a decision and explain how it affects the goal.

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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