A firm’s current balance sheet is as follows:Assets $100 Debt $10 Preferred stock $90a.
A firm’s current balance sheet is
as follows:Assets $100 Debt $10 Preferred
stock $90a. What is the firms
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 Capital0% 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 $? Preferred
stock $?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?
