Problem 22-10 The financial manager has determined the following schedules for the cost of funds: Cost of Debt 4% Debt ratio 0% Assets 10 20 30 40 50 60 Assets 4 4 4 $400 4 5 a. Determine the firm's optimal capital structure. Round your answer to two decimal places. The optimal capital structure consists of -Select-9% debt resulting in the cost of capital equal to 7 %. b. Construct a simple pro forma balance sheet that shows the firm's optimal combination of debt and equity for its current level of assets. Round your answers to the nearest dollar. Balance Sheet Cost of Equity 11% 11 11 11 12 13 14 Debt Equity An investment costs $500 and offers annual cash inflows of $186 for four years. Should the firm make the investment? Use Appendix D to answer the question. Round your answer to the nearest whole number. The investment -Select- be made since the internal rate of return that is o the cost of capital. If the firm makes this additional investment, how should its balance sheet appear? Round your answers to the nearest dollar. Balance Sheet Debt $ Equity 400 $ % -Select- If the firm is operating with its optimal capital structure and a $500 asset yields 30.0 percent, what return will the stockholders earn on their investment in the asset? Round your answer to two decimal places.
Problem 22-10 The financial manager has determined the following schedules for the cost of funds: Cost of Debt 4% Debt ratio 0% Assets 10 20 30 40 50 60 Assets 4 4 4 $400 4 5 a. Determine the firm's optimal capital structure. Round your answer to two decimal places. The optimal capital structure consists of -Select-9% debt resulting in the cost of capital equal to 7 %. b. Construct a simple pro forma balance sheet that shows the firm's optimal combination of debt and equity for its current level of assets. Round your answers to the nearest dollar. Balance Sheet Cost of Equity 11% 11 11 11 12 13 14 Debt Equity An investment costs $500 and offers annual cash inflows of $186 for four years. Should the firm make the investment? Use Appendix D to answer the question. Round your answer to the nearest whole number. The investment -Select- be made since the internal rate of return that is o the cost of capital. If the firm makes this additional investment, how should its balance sheet appear? Round your answers to the nearest dollar. Balance Sheet Debt $ Equity 400 $ % -Select- If the firm is operating with its optimal capital structure and a $500 asset yields 30.0 percent, what return will the stockholders earn on their investment in the asset? Round your answer to two decimal places.
Fundamentals of Financial Management (MindTap Course List)
14th Edition
ISBN:9781285867977
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter10: The Cost Of Capital
Section: Chapter Questions
Problem 1TCL: CALCULATING 3Ms COST OF CAPITAL In this chapter, we described how to estimate a companys WACC, which...
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Transcribed Image Text:Problem 22-10
The financial manager has determined the following schedules for the cost of funds:
Cost of Debt
Debt ratio
0%
10
20
30
40
50
60
Assets
4
4
$400
Assets
4
4
5
a. Determine the firm's optimal capital structure. Round your answer to two decimal places.
The optimal capital structure consists of -Select- % debt resulting in the cost of capital equal to
7
b. Construct a simple pro forma balance sheet that shows the firm's optimal combination of debt and equity for its current level of assets. Round
your answers to the nearest dollar..
Balance Sheet
Cost of Equity
11%)
11
11
11
12
13
14
Debt
Equity
%.
$
400
c. An investment costs $500 and offers annual cash inflows of $186 for four years. Should the firm make the investment? Use Appendix D to
answer the question. Round your answer to the nearest whole number..
The Investment -Select-
be made since the internal rate of return that is
% -Select-
o the cost of capital.
d. If the firm makes this additional investment, how should its balance sheet appear? Round your answers to the nearest dollar.
Balance Sheet
Debt
Equity
e. If the firm is operating with its optimal capital structure and a $500 asset yields 30.0 percent, what return will the stockholders earn on their
investment in the asset? Round your answer to two decimal places.
%
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