Ch 21: End-of-Chapter Problems - Cost of Capital eBook Problem 21-03 A firm's current balance sheet is as follows: Assets $100 Debt $20 Equity $80 a. What is the firm's weighted average cost of capital at various combinations of debt and equity, given the following information? Round your answers to one decimal place. Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital 0% 6% 13% 10 6 13 % 20 7 14 % 30 8 15 % 40 9 16 % 50 11 16 % 60 12 17 % b. Construct a pro forma balance sheet that indicates the firm's optimal capital structure. Choose the best structure from the options analyzed in part a. Compare this balance sheet with the firm's current balance sheet. Round your answers to the nearest dollar. Assets $100 Debt Equity $ What course of action should the firm take? Round your answer to the nearest whole number. Since the firm is currently using % debt financing, it Select Dat its optimal capital structure and Select c. As a firm initially substitutes debt for equity financing, what happens to the cost of capital? The cost of capital initially Select- d. If a firm uses too much debt financing, why does the cost of capital rise? If a firm uses too much debt financing, the firm becomes Select financially leveraged and riskier. This causes the interest rate to changes in the cost of debt and equity cause the cost of capital to -Select- Select and the cost of equity to -Select 2. These