Fin 370 - Week 5 Essay

295 WordsJan 19, 20112 Pages
Week 5 Individual Problems FIN370 August 5, 2010 Charles Prescott 3) 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 |WACC | |0% |8% |12% |12% | |10 |8 |12 |11.6 | |20 |8 |12 |11.2 | |30 |8 |13 |11.5 | |40 |9 |14 |12 | |50 |10 |15 |12.5 | |60 |12 |16 |13.6 | 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? | |Current Balance Sheet | |Assets |$100 |Debt |$10 | | | |Equity |$90 | |Total Assets |$100 |Total Debt and Equity |$100 | | |Pro Forma Balance Sheet | |Assets |$100 |Debt

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