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3. A firm's current balance sheet is as follows: Assets $100 Debt $10 Equity $90 a) What is the firm's weightedaverage cost of capital at various

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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 ? 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 $? 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? 
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