Problem 3 assignment

Problem 3 assignment - 3 A firm's current balance sheet is...

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3. A firm's current balance sheet is as follows: Assets \$100 Debt \$10 Â Â 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 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 ? Debt/Assets Wd After-Tax Cost of Debt We Cost of Equity Cost of Capital 0% 0 8% 1 12% 0.12 = 12% 10% 0.1 8% 0.9 12% 0.116 = 11.6% 20% 0.2 8% 0.8 12% 0.112 =11.2% 30% 0.3 8% 0.7 13% 0.115 =11.5% 40% 0.4 9% 0.6 14% 0.12 = 12% 50% 0.5 10% 0.5 15% 0.125 =12.5% 60% 0.6 12% 0.4 16% 0.136 = 13.6% 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 \$? Â Â Equity \$? Balance Sheet at Optimal Capital Structure Asset 100 Liabilities 20 Equity 80 Total 100 100 Current Balance Sheet

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This note was uploaded on 04/11/2011 for the course FIN 370 taught by Professor Unknown during the Spring '08 term at University of Phoenix.

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Problem 3 assignment - 3 A firm's current balance sheet is...

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