Numbers

A unfluctuatings current symmetricalness tag is as follows: Assets $100 Debt $10 faithfulness $90 a. What is the firms weight down-average represent of great(p) at various combinations of debt and equity, accustomed the following information? Debt Asset After tax damage of debet Cost of equity Cost of Capital 0% 8% 12% ? 10% 8% 12% ? 20% 8% 12% ? 30% 8% 13% ? 40% 8% 14% ? 50% 10% 15% ? 60% 12% 16% ? b. Construct a pro forma balance winding-clothes that indicates the firms optimal great(p) structure. Compare this balance sheet with the firms current balance sheet. What die hard 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?

The cost of capital (k) is a weighted average:
k = (weight)(cost of debt) + weight(cost of equity)

Debt/ Weight x + Weight x = Cost of
Assets Cost Cost Capital
of Debt of Equity
0% (.0)(.08) + (1.0)(.12) = .120
10 (.1)(.08) + (.9)(.12) = .116
20 (.2)(.08) + (.8)(.12) = .112
30 (.3)(.08) + (.7)(.13) = .115
40 (.4)(.09) + (.6)(.14) = .



120
50 (.5)(.10) + (.5)(.15) = .125
60 (.6)(.12) + (.4)(.16) = .136

b. The optimal capital structure is that combination, which minimizes the firms cost of capital. In this case that occurs where debt is 20% of capital and the cost of capital is 11.2%. The balance sheet is

Assets $100 Liabilities $20
Equity 80

Since the firm is currently using only 10% debt financing, it is not at its optimal capital structure and should substitute somewhat debt for equity.

c. The cost of capital initially declines because the effective cost of debt is slight than the cost of...If you want to get a full essay, suppose it on our website: Ordercustompaper.com



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