I need this by Sunday, if Possible, and thanks ahead of time for agreeing to hel
ID: 2663972 • Letter: I
Question
I need this by Sunday, if Possible, and thanks ahead of time for agreeing to help me.
Be sure to cite any references you use to solve these questions.
1. The after-tax cost of debt and the cost of equity as follows for a firm at various percentages of debt in its capital structure. Calculate the firm’s weighted average cost of capital at each combination of debt and equity:
Debt / Assets
After-Tax Cost of Debt
Cost of Equity
Weighted Average Cost of Capital
0%
6%
10%
?
10%
6%
10%
?
20%
7%
10%
?
30%
8%
11%
?
40%
9%
13%
?
50%
10%
14%
?
60%
12%
16%
?
2. A firm’s current balance sheet is as follows:
Assets
$100,000
Debt
$10,000
Equity
$90,000
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?
.
Debt / Assets
After-Tax Cost of Debt
Cost of Equity
Weighted Average Cost of Capital
0%
6%
10%
?
10%
6%
10%
?
20%
7%
10%
?
30%
8%
11%
?
40%
9%
13%
?
50%
10%
14%
?
60%
12%
16%
?
Explanation / Answer
WACC is easy...don't let it scare you... WACC answers this question: "what is the average cost the company assumes for rasining capital. This average cost is "weighted" so that it considers the relative proportions of debt and equity. Here's the formula WACC = wd*rd(1-t) + ws*rs since there is no preferred stock. wd = the percentage of debt to capital structure rd = the cost of debt (1-t) = interest is still tax deductible ws = percentage of equity to total capital structure rs = cost of equity percent debt after tax cost of debt cost of equity WACC 0 0 .10*1=.1 .1 + 0 = 10% 10% .1*.6=.006 .9*.1=.09 .09+.006 = 9.6% 20% .2*.07=.014 .8*.1=.08 .014+.08=9.4% 30% .3*.08 = .024 .7*.11=.77 .024+.77=10.1% 40% .4*.09=.036 .6*.13=.78 .036+.78 = 11.4% 50% .5*.1=.05 .5*.14=.07 .05+.7 = 12% 60% .6*.12=.072 .4*.16=.064 .072+.064=13.6% The company should issue $12,500 in bonds (i.e. debt) therefore total assets = $112,500 Debt = $22,500 = 20% Equity = $90,00 = 80% The rest is yours to figure out....
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.