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Finance:Optimal capital strucutre and the Balance sheet.

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Please assist in responding to the following attached questions.

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?

Textbook states that the current balance sheet is:

Assets $100 Debt $10
Equity $90

Construct pro forma balance sheet: (ie: fill in question marks)

Assets $100 Debt ?
Equity ?

Debt/Assets After tax Cost of debt Cost of Equity Cost of capital
0% 8% 12% 12.00%
10% 8% 12% 11.60%
20% 8% 12% 11.20%
30% 8% 12% 10.80%
40% 9% 14% 10.80%
50% 10% 15% 11.00%
60% 12% 16% 12.00%

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Solution Summary

The problem deals with determining the best capital structure for a firm given the weights associated with debt and equity.

Solution provided by:
Chidi Ngene, M. Sc.
Education
  • B. Sc., University of Nigeria
  • M. Sc., London South Bank University
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