Question: NEED AS SOON AS POSSIBLE SHOW ANSWERS USING FORMULA AND CALCULATIONS (NOT EXCEL) Smart Ltd has the following balance sheet structure: Assets Liabilities and Equity

NEED AS SOON AS POSSIBLE SHOW ANSWERS USING FORMULA AND CALCULATIONS

NEED AS SOON AS POSSIBLE

SHOW ANSWERS USING FORMULA AND CALCULATIONS (NOT EXCEL)

Smart Ltd has the following balance sheet structure: Assets Liabilities and Equity Assets $1000 Debt $300 Equity $700 Total $1000 $1000 Smart Ltd's debtholders require a return of 9% and shareholders require a return of 11%. Ignore tax rates. Mr Very Smart, the CEO of Smart Ltd tells the Board of Smart Ltd that shareholders require a very high return, it's cheaper to use debt to fund our projects. We should therefore raise debt and reduce our equity holdings. This will increase our returns. Required: 1. Calculate the weighted average cost of capital for Smart Ltd. 1 mark. 2. Justify Mr Very Smart's advice to the Board of Smart Ltd. 3 marks

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