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weighted-average cost of capital with Various Combinations

Test: Basic Finance: A Introduction to Financial Institutions, Investments and Management. Chapter 21; page 396; problem #3.

"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 deb and equity, given the following information?

etc.

Solution Preview

Basic Finance: A Introduction to Financial Institutions, Investments and Management. Chapter 21; page 396; problem #3.
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% 12%
10% 8% 12% 11.60%
20% 8% 12% 11.20%
30% 8% 13% 11.50%
40% 9% 14% 12%
50% 10% 15% 12.50%
60% 12% 16% 13.60%

cost of capita (k) = (weight) ...

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 deb and equity, given the following information.

$2.19