A firm’s current balance sheet is as follows: Assets $ 110 Debt $ 44 Equity $ 66 What is the firm’s weighted-average cost of capital at various combinations of debt and equity, given the following information? Round your answers to one decimal place. Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital 0 % 6 % 13 % % 10 6 13 % 20 6 13 % 30 7 14 % 40 8 15 % 50 9 16 % 60 11 17 % Construct a pro forma balance sheet that indicates the firm’s optimal capital structure. Choose the best structure from the options analyzed in part a. Compare this balance sheet with the firm’s current balance sheet. Round your answers to the nearest dollar. Assets $ 110 Debt $ Equity $ What course of action should the firm take? Round your answer to the nearest whole number. Since the firm is currently using % debt financing, it at its optimal capital structure and As a firm initially substitutes debt for equity financing, what happens to the cost of capital? The cost of capital initially If a firm uses too much debt financing, why does the cost of capital rise? If a firm uses too much debt financing, the firm becomes financially leveraged and riskier. This causes the interest rate to and the cost of equity to . These changes in thecost of debt and equity cause the cost of capital to .

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN:9781285867977

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter10: The Cost Of Capital

Section: Chapter Questions

Problem 1TCL: CALCULATING 3Ms COST OF CAPITAL In this chapter, we described how to estimate a companys WACC, which...

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A firm’s current balance sheet is as follows:

Assets	$	110		Debt	$	44
				Equity	$	66

What is the firm’s weighted-average cost of capital at various combinations of debt and equity, given the following information? Round your answers to one decimal place.

Debt/Assets	After-Tax Cost of Debt	Cost of Equity	Cost of Capital
0	%	6	%	13	%	%
10		6		13		%
20		6		13		%
30		7		14		%
40		8		15		%
50		9		16		%
60		11		17		%

Construct a pro forma balance sheet that indicates the firm’s optimal capital structure. Choose the best structure from the options analyzed in part a. Compare this balance sheet with the firm’s current balance sheet. Round your answers to the nearest dollar.

Assets $ 110 Debt $

Equity $

What course of action should the firm take? Round your answer to the nearest whole number.

Since the firm is currently using   % debt financing, it  at its optimal capital structure and
As a firm initially substitutes debt for equity financing, what happens to the cost of capital?
The cost of capital initially
If a firm uses too much debt financing, why does the cost of capital rise?
If a firm uses too much debt financing, the firm becomes financially leveraged and riskier. This causes the interest rate to and the cost of equity to . These changes in thecost of debt and equity cause the cost of capital to .

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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