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A firm's current balance sheet is as follows:

Assets

$100

Debt

$10

 

 

Equity

$90

problem1: Determine the firm's weighted-average cost of capital at various combinations of debt & 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

?

problem2: Make 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

$?

problem3: As a firm initially substitutes debt for equity financing, what happens to the cost of capital, & why? If a firm uses too much debt financing, why does the cost of capital rise?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M917112

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