FIN 370
WK 5 P3 Assignment from reading
Assets $100 Debt $10
Equity $90
Equity $?
a. What is the firm's weighted-average cost of capital at various combinations of debt and equity, given the following information?
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?
Finance 370 Week 5
Text Problem 3
3. A firm's current balance sheet
is as follows:
Assets $100 Debt $10
Equity $90
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 8 12 ?
30 8 13 ?
40 9 14 ?
50 10 15 ?
60 12 16 ?
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 $?
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? a. What is the firm's weighted-average cost of capital at various combinations of debt and equity, given the following information?
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?
File name:
A-firms-current-balance-sheet-is-as-follows.doc File type: application/msword Price: $7
