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    Balance Sheet

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    Balance Sheet for a Company
    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, 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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    https://brainmass.com/business/financial-statements/balance-sheet-236286

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    Solution Summary

    This solution is comprised of a detailed explanation to answer what is the firm's weighted-average cost of capital at various combinations of debt and equity, given the following information.

    $2.19

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