Q. An organization's current balance sheet is as follows:
Assets $100 Debt $10
Equity $90

1.Illustrate what is the organization'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% 12
10 8 12 11.6
20 8 12 11.2
30 8 13 11.5
40 9 14 12
50 10 15 12.5
60 12 16 13.6

2. Construct a pro forma balance sheet that indicates the organization's optimal capital structure. Compare this balance sheet with the organization's current balance sheet. Illustrate what course of action should the organization take?

3. Explain how do I start a pro forma balance sheet? Do I just pick an amount for debit and equity that will equal 100? If so, Explain how do I do start an optimal capital structure?