Cost Of Capital

3. A households flow rate end stable gear is as follows: Assets $100 Debt $10 integrity $90 a. What is the dissolutes weighted-average exist of becoming at various combinations of debt and law, habituated the following information? Debt/Assets After-Tax exist of Debt embody of truth Cost of Capital 0% 8% 12% 12% 10% 8% 12% 11.60% 20% 8% 12% 11.20% 30% 8% 13% 11.50% 40% 9% 14% 12% 50% 10% 15% 12.50% 60% 12% 16% 13.60% b. bring to pass a pro forma end sheet that indicates the strongs optimal seat of government structure. canvas this eternal rest sheet with the households current balance sheet. What course of action should the firm take?

optimal residuum Sheet |Assets |$100 |Debt |$20 | | | |Equity |$80 | genuine ratio Sheet |Assets |$100 |Debt |$10 | Equity $90 The firm should absorb $10 from its creditors in order to see $10 of its line of moving in issued; which would align the firm up to have the optimal structure. c. As a firm ab initio substitutes debt for faithfulness financing, what happens to the price of roof, and why? The cost of capital ab initio decreases as the firm substitutes debt for loveliness financing. This occurs because the initial out pus of the cost of acquire is slight that the growth of the cost of equity. d. If a firm uses too frequently debt financing, why does the cost of capital rise? The cost of capital result increase of the firm used too practically debt. This occurs because the growth of the cost of borrowing is more than the growth of the cost of equity at certain levels of financing.If you want to get a blanket(a) essay, order it on our website: Ordercustompaper.com

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