What is the firms weighted-average cost of capital

Reference no: EM13331937

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 ofdebt Cost ofEquity 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.

Assets $100 Debt $?

Equity $?

(d) If a firm uses too much debt financing, why does the cost of capital rise?

Reference no: EM13331937

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