A firm’s current balance sheet is as follows: Assets $ 110 Debt $ 44 Equity $ 66 What is the firm’s weighted-average cost of capital at various combinations of debt and equity, given the following information? Round your answers to one decimal place. Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital 0 % 6 % 13 % % 10 6 13 % 20 6 13 % 30 7 14 % 40 8 15 % 50 9 16 % 60 11 17 % Construct a pro forma balance sheet that indicates the firm’s optimal capital structure. Choose the best structure from the options analyzed in part a. Compare this balance sheet with the firm’s current balance sheet. Round your answers to the nearest dollar. Assets $ 110 Debt $ Equity $ What course of action should the firm take? Round your answer to the nearest whole number. Since the firm is currently using % debt financing, it at its optimal capital structure and As a firm initially substitutes debt for equity financing, what happens to the cost of capital? The cost of capital initially If a firm uses too much debt financing, why does the cost of capital rise? If a firm uses too much debt financing, the firm becomes financially leveraged and riskier. This causes the interest rate to and the cost of equity to . These changes in thecost of debt and equity cause the cost of capital to .

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter12: Balanced Scorecard And Other Performance Measures

Section: Chapter Questions

Problem 7EB: Assume Plainfield Manufacturing has debt of $6,500,000 with a cost of capital of 9.5% and equity of...

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A firm’s current balance sheet is as follows:

Assets	$	110		Debt	$	44
				Equity	$	66

What is the firm’s weighted-average cost of capital at various combinations of debt and equity, given the following information? Round your answers to one decimal place.

Debt/Assets	After-Tax Cost of Debt	Cost of Equity	Cost of Capital
0	%	6	%	13	%	%
10		6		13		%
20		6		13		%
30		7		14		%
40		8		15		%
50		9		16		%
60		11		17		%

Construct a pro forma balance sheet that indicates the firm’s optimal capital structure. Choose the best structure from the options analyzed in part a. Compare this balance sheet with the firm’s current balance sheet. Round your answers to the nearest dollar.

Assets $ 110 Debt $

Equity $

What course of action should the firm take? Round your answer to the nearest whole number.

Since the firm is currently using   % debt financing, it  at its optimal capital structure and
As a firm initially substitutes debt for equity financing, what happens to the cost of capital?
The cost of capital initially
If a firm uses too much debt financing, why does the cost of capital rise?
If a firm uses too much debt financing, the firm becomes financially leveraged and riskier. This causes the interest rate to and the cost of equity to . These changes in thecost of debt and equity cause the cost of capital to .

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