Share
Explore BrainMass

Balance Sheet

Please see attached.

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?

Attachments

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