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# WACC calculations and pro-forma balance sheet

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k = W1Kd + W2Kp + W3Ke

1. 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 \$?

#### Solution Preview

See the attached file for complete solution. The text here may not be copied exactly as some of the symbols / tables may not print. Thanks

1. 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 ...

#### Solution Summary

This solution provides WACC calculations and a pro-forma balance sheet.

\$2.19
Similar Posting

## Calculate WACC; Construct a Pro Forma Balance Sheet

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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