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Fin 370 Week 5 P21-3 text questions individual assignment - A firm’s current balance sheet - EXCEL TEMPLATE

Fin 370 Week 5 P21-3 text questions individual assignment  - EXCEL TEMPLATE
An Introduction to Financial Institutions, Investments, and Management by Mayo

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? Show work.

Debt/Assets After-Tax Cost of Debt Cost of Equity 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 sheet. What course 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?


SOLUTION PREVIEW [EXCEL TEMPLATE]
Equity
Debt/Assets
After-Tax Cost of Debt
Cost of Equity
Cost of Capital
100.0%
0%
8%
12%
12.0%
90.0%
10%
8%
12%
11.6%
80.0%
20%
8%
12%
11.2%

 File name: Fin-370-Week-5-P21-3.xls File type: application/vnd.ms-excel Price: $8