Numbers

A unfluctuatings current symmetricalness pock is as follows: Assets $100 Debt $10 faithfulness $90 a. What is the unbendables weight down-average represent of great(p) at various combinations of debt and equity, abandoned the following information? Debt Asset After tax legal injury of debet Cost of equity Cost of Capital 0% 8% 12% ? 10% 8% 12% ? 20% 8% 12% ? 30% 8% 13% ? 40% 8% 14% ? 50% 10% 15% ? 60% 12% 16% ? b. Construct a pro forma balance pall that indicates the souseds optimal great(p) structure. Compare this balance tatter with the firms current balance sheet. What die unspoken of action should the firm take? Assets $100 Debt $? Equity $? c. As a firm initially substitutes debt for equity financing, what happens to the hail of capital, and why? d. If a firm uses too much debt financing, why does the constitute of capital rise? The damage of capital (k) is a burden average: k = (weight)(cost of debt) + weight(cost of equity) De bt/ Weight x + Weight x = Cost of Assets Cost Cost Capital of Debt of Equity 0% (.0)(.08) + (1.0)(.12) = .120 10 (.1)(.08) + (.9)(.12) = .116 20 (.2)(.08) + (.8)(.12) = .112 30 (.3)(.08) + (.7)(.13) = .115 40 (.4)(.09) + (.6)(.14) = .120 50 (.5)(.10) + (.5)(.15) = .125 60 (.6)(.12) + (.4)(.16) = .136 b. The optimal capital structure is that combination, which minimizes the firms cost of capital. In this case that occurs where debt is 20% of capital and the cost of capital is 11.2%. The balance sheet is Assets $100 Liabilities $20 Equity 80 Since the firm is cu rrently using only 10% debt financing, it is! not at its optimal capital structure and should substitute somewhat debt for equity. c. The cost of capital initially declines because the effective cost of debt is slight than the cost of...If you want to get a full essay, suppose it on our website: OrderEssay.net

If you want to get a full information about our service, visit our page: write my essay