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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 variouscombinations
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 variouscombinations of debt and equity, given the following information? Debt/Assets After-Tax Cost ofDebt Cost ofEquity 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'soptimal capital structure. Compare this balance sheet with the firm's current balance sheet.What course of action should the firm take? Assets $100 Debt $? Equity $? c. As a firm initially substitutes debt for equity financing, whathappens to the cost of capital, and why? d. If a firm uses too much debt financing, why does the cost ofcapital rise
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