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Afirm's current balance sheet is as follows: Assets $100 Debt $10 Equity $90 What is the firm's weighted-average cost of capital at various combinations of
Afirm's current balance sheet is as follows: Assets $100 Debt $10 Equity $90 What is the firm's weighted-average cost of capital at various combinations of debt and equity,given the following information? After-Tax Cost of Cost of Cost of Capital Equity Debt/Assets Debt 0% 8% 12% ? 10 8 12 ? 20 8 12 ? 30 8 13 ? 40 9 14 ? 50 10 15 ? 60 12 16 ? Construct a pro forma sheet that indicates the firm's optima capital structure.Compare this balance sheet.What course of action should the firm take? Assets $100 Debt $? Equity $? As a firm initially substitutes debt for equity financing, what happens to the cost of capital,and why? If a firm uses too much debt financing,why does the cost of the capital rise?
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