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Computation of weighted average cost of capital
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
30
13
40
9
14
50
15
60
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?
$?
c. As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why?
If a firm uses too much debt financing, why does the cost of capital rise
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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