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Balance sheets

05 / 03 / 2018 Assignment

This paper circulates around the core theme of Balance sheets together with its essential aspects. It has been reviewed and purchased by the majority of students thus, this paper is rated 4.8 out of 5 points by the students. In addition to this, the price of this paper commences from £ 45. To get this paper written from the scratch, order this assignment now. 100% confidential, 100% plagiarism-free.

3. 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% ?

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’s
optimal 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, what
happens to the cost of capital, and why?

d) If a firm
uses too much debt financing, why does the cost of capital rise?

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