A firm$$s current balance sheet is as follows:

Assets $$100$ Debt $$10$ 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

$0\%8\%12\%?$

$10812?$

$20812?$

$30813?$

$40914?$

$501015?$

$601216?$

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?