Answer the following questions about capital structure choices. The following table gives the details of a...

   

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Answer the following questions about capital structure choices. The following table gives the details of a balance sheet of a company. Asset Fixed investments Value Liability Value 300,000 Debt 150,000 Equity 150,000 Total assets 300,000 Total liabilities 300,000 a. The cost of debt capital is 5% and the cost of equity capital is 12%. What is the weighted average cost of capital of the firm? (10 marks) b. Suppose the firm increases its borrowing by 50,000 to 200,000, and uses the proceeds from the debt issue to repurchase 50,000 worth of equity. With the additional borrowing, the cost of debt increases to 5.5%. With the additional borrowing, the cost of debt increases to 5.5%. What is the cost of equity capital for the firm now? Assume the firm pays no taxes or incurs deadweight bankruptcy costs in default. Answer the following questions about capital structure choices. The following table gives the details of a balance sheet of a company. Asset Fixed investments Value Liability Value 300,000 Debt 150,000 Equity 150,000 Total assets 300,000 Total liabilities 300,000 a. The cost of debt capital is 5% and the cost of equity capital is 12%. What is the weighted average cost of capital of the firm? (10 marks) b. Suppose the firm increases its borrowing by 50,000 to 200,000, and uses the proceeds from the debt issue to repurchase 50,000 worth of equity. With the additional borrowing, the cost of debt increases to 5.5%. With the additional borrowing, the cost of debt increases to 5.5%. What is the cost of equity capital for the firm now? Assume the firm pays no taxes or incurs deadweight bankruptcy costs in default.