Fin 370

A firms latest proportionality aeroplane is as follows Assets$ stage centigradeDebt$10 Equity$90 A)What is the firms weighted-average woo of great at various combinations of debt and loveliness, accustomed the following information? 1. Debt/AssetsAfter-Tax toll of DebtCost of EquityCost of keen 0%(.0)(.08)(1.0)(12).120 10(.1)(.08)(.9)(.12).116 20(.2)(.08)(.8)(.12).112 30(.3)(.08)(.7)(.13).115 40(.4)(.09)(.6)(.14).120 50(.5)(.10)(.5)(.15).125 60(.6)(.12)(.4)(.16).136 B)Construct a pro forma balance sheet that indicates the firms surpass capital letter social organisation. Compare this balance sheet with the firms current balance sheet. What course of action should the firm take? The optimal capital structure is that combination, which minimizes the firms be of capital. In this case that occurs where debt is 20% of capital and the hail of capital is 11.2%.

The balance sheet is Assets $century Liabilities $20 Equity 80 Since the firm is currently using solitary(prenominal) 10% debt financing, it is not at its optimal capital structure and should substitute(a) some debt for equity. C)As a firm initially substitutes debt for equity financing, what happens to the exist of capital, and why? The cost of capital initially declines because the potent cost of debt is less than the cost of equity D)If a firm uses overly much debt financing, why does the cost of capital rise? As the firm continues to substitute debt for equity, the firm becomes more financially leveraged and riskier. This causes the relate rate to r! ise and the cost of equity to increase. These increases in the cost of debt and equity cause the cost of capital (i.e., the weighted average) to increaseIf you extremity to get a full essay, order it on our website: BestEssayCheap.com

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