Dropdowns:

Since the firm is currently using () % debt financing, it (is, is not) at its optimal capital structure and (Should not change the capitol structure, should substitute some debt for equity, should substitute some equity for debt.)

C. As a firm initially substitutes debt for equity financing, what happens to the cost of capital?

The cost of capital initially (decreases, increases, does not change)

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 (more, less) financially leveraged and riskier. This causes the interest rate to (rise, fall) and the cost of equity to (increase, decrease) These changes in the cost of debt and equity cause the cost of capital to (increase, decrease)

Problem 21-03 A firm's current balance sheet is as follows: Debt Equity 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. After-Tax Cost of Debt Cost of Capital 8% 8 TTT 8 9 10 12 13 Debt/Assets 0% 10 20 30 40 50 60 Assets $ 140 Assets $ 140 What course of action should the firm take? Round your answer to the nearest whole number. Since the firm is currently using c. As a firm initially substitutes debt for equity financing, what happens to the cost of capital? The cost of capital initially -Select- Debt Equity Cost of Equity 15% 15 15 15 16 $28 $ 112 16 18 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. % debt financing, it -Select- at its optimal capital structure and -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 -Select- and the cost of equity to -Select- . These changes in the cost of debt and equity cause the cost of capital to -Select