Question

Can someone please help with this problem.
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?
Debit/Assets 0%, 10%, 20%, 30%, 40% 50%, 60%
After-tax cost of Debt 8%, 8%, 8%, 9%, 10%, 12%
Cost of Equity 12%, 12%, 12%, 13%, 14%, 15%, 16%
B) Construct a pro forma balance sheet that indicates the firm's optimal capital structure. Compare this balance sheet with firm's current balance sheet. What course of action should the firm tak

Answer 1

wacc=cost of debt*(portion of debt in capital structure)+cost of equity *(portion of equity in capital)

if debt=10 and equity=90
cost of debt=8%
cost of equity=12% (as the present ratio shows debt/asset=10/100=10% so corresponding values of cost of debt(which has no effect of tax as it is paid before tax is paid)=8%,cost of equity=12%

wacc=8%*.1+12%*.9=11.6%