Explore BrainMass
Share

WACC calculations and pro-forma balance sheet

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Please see attachment attached

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 $?

© BrainMass Inc. brainmass.com October 16, 2018, 10:00 pm ad1c9bdddf
https://brainmass.com/business/weighted-average-cost-of-capital/wacc-calculations-and-pro-forma-balance-sheet-205005

Attachments

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?

View Full Posting Details