The financial manager has determined the following schedules for the cost of funds: Cost of Debt Debt ratio: 0% 10 20 30 40 50 60 Assets Assets 4 4 4 4 5 a. Determine the firm's optimal capital structure. Round your answer to two decimal places. 8.80 %. The optimal capital structure consists of 40 0 b. Construct a simple pro forma balance sheet that shows the firm's optimal combination of debt and equity for its current level of assets. Round your answers to the nearest dollar. $400 7 % debt resulting in the cost of capital equal to Balance Sheet Cost of Equity 11% 11 11 11 12 13 14 Debt Equity $ Debt 160 $ c. An investment costs $500 and offers annual cash inflows of $186 for four years. Should the firm make the investment? Use Appendix D to answer the question. Round your answer to the nearest whole number. The investment should O be made since the internal rate of return that is % exceeds O d. If the firm makes this additional investment, how should its balance sheet appear? Round your answers to the nearest dollar. Balance Sheet ✪ Equity 240 400 18 the cost of capite 2. If the firm is operating with its optimal capital structure and a $500 asset yields 30.0 percent, what return will the stockholders earn on their investment in the asset? Round your answer to two decimal places. %
The financial manager has determined the following schedules for the cost of funds: Cost of Debt Debt ratio: 0% 10 20 30 40 50 60 Assets Assets 4 4 4 4 5 a. Determine the firm's optimal capital structure. Round your answer to two decimal places. 8.80 %. The optimal capital structure consists of 40 0 b. Construct a simple pro forma balance sheet that shows the firm's optimal combination of debt and equity for its current level of assets. Round your answers to the nearest dollar. $400 7 % debt resulting in the cost of capital equal to Balance Sheet Cost of Equity 11% 11 11 11 12 13 14 Debt Equity $ Debt 160 $ c. An investment costs $500 and offers annual cash inflows of $186 for four years. Should the firm make the investment? Use Appendix D to answer the question. Round your answer to the nearest whole number. The investment should O be made since the internal rate of return that is % exceeds O d. If the firm makes this additional investment, how should its balance sheet appear? Round your answers to the nearest dollar. Balance Sheet ✪ Equity 240 400 18 the cost of capite 2. If the firm is operating with its optimal capital structure and a $500 asset yields 30.0 percent, what return will the stockholders earn on their investment in the asset? Round your answer to two decimal places. %
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 1CMA
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Concept explainers
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
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Transcribed Image Text:The financial manager has determined the following schedules for the cost of funds:
Debt ratio
0%
288928
Assets
0
10
Assets
20
30
40
50
Cost of Debt
$400
4%
4
4
4
4
60
a. Determine the firm's optimal capital structure. Round your answer to two decimal places.
The optimal capital structure consists of 40
% debt resulting in the cost of capital equal to
O
8.80
b. Construct a simple pro forma balance sheet that shows the firm's optimal combination of debt and equity for its current level of assets. Round
your answers to the nearest dollar.
5
7
Balance Sheet
Debt
Cost of Equity
11%
11
11
11
Equity
$
12
13
14
$
400
c. An investment costs $500 and offers annual cash inflows of $186 for four years. Should the firm make the investment? Use Appendix D to
answer the question. Round your answer to the nearest whole number.
be made since the internal rate of return that is
The investment should
the cost of capital.
Debt
160
% exceeds O
d. If the firm makes this additional investment, how should its balance sheet appear? Round your answers to the nearest dollar.
Balance Sheet
Equity
240
18
Ⓡ
e. If the firm is operating with its optimal capital structure and a $500 asset yields 30.0 percent, what return will the stockholders earn on their
investment in the asset? Round your answer to two decimal places.
%
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