firm's cost of capital
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Given the following schedules:
Debt/Assets Cost of Debt Cost of Equity Cost of Capital
0% 7% 14%
10 7 14
20 7 14
30 8 14
40 8 16
50 10 18
60 10 20
a. What is firm's cost of capital at the various combinations of debt and equity?
b. What is the firm's optimal capital structure? Construct a balance sheet showing that combination of debt and equity financing.
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The solution examines a firm's cost of capital.
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