if A firm's current balance sheet is as follows:Assets                      $100                   Debt                                $10                                                          Equity                                $90a. 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 capital0%                                       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 to the cost of capital, and why?d. If a firm uses too much debt financing, why does the cost of capital rise?

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Asked Apr 1, 2019
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if 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 to the cost of capital, and why?

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

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a. In this part we use the WACC formula stated above in order to find WACC at various comninations of debt and equity.

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b. The pro forma balance sheet of the firm's optimal capital structure has been shown above. 

The firm 's current balance sheet has 10% debt. However, balance sheet for optimal capital structi...

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