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Calculate WACC in various combinations

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Solution Summary

This solution illustrates how to calculate a company's weighted-average cost of capital at different debt/equity combinations and how to construct a pro-forma balance sheet at the optimal capital structure.

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Please see the attached Word 97-2003 document.

a. (see attached file)

b. (see attached file)

c. The cost of capital drops because the after-tax cost of debt is less than the cost of equity. Therefore, by the operation of math the company's weighted-average cost of capital decreases as more of its capital structure consists of a lower-cost component.

d. As the company's debt load increases, the amount ...

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