global expansion - Business accounting Name Institution of...

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Business accounting Name Institution of affiliation Professor Date Accounting Homework answers Question 1 %debt/assets After tax cost of debt % equity/assets Cost of equity Cost of capital 0 7.5 100 12.0 12.00 20 7.8 80 12.3 11.40 40 8.1 60 12.8 10.92 60 10.2 40 14.0 11.72 80 16.3 20 22.0 17.44 100 22.0 0 35.0 22.00 Calculating cost of capital Cost of capital= (cost of equity*(equity/asset ratio)+cost of debt*(debt/asset ratio)) I. 7.5(0)+12(1) =12.00 II. 7.8(0.2)+12.3(0.8)=11.4 III. 8.1(0.4)+12.8(0.6) =10.92 IV. 10.2(0.6)+14(0.4) =11.72 V. 16.3(0.8)+22(0.2) =17.44 VI. 22(1)+35(0) =22.00 a) If the firm has a structure to minimize cost of capital The percentages of debt and equity to use as show from the above calculations are Equity 60%
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Debt 40% These two combinations will give the minimum cost of capital of 10.92% b) If a firm substitutes debt with equity, the cost of capital will decrease c) When more debt gets used, the cost of debt and equity rises because the increased debt magnifies the variability of equity and debt. Question 2 APV method I. For a firm financed fully by equity the value is given by Firm value= FCFF (1+g)/WACC-g
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