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Week Five – Individual Assignment
University of Phoenix
(A)
The weighted average cost is can be found by completing the following:
Cost of capital = proportion of debt (x) after-tax cost of debt (+) proportion of equity (x) the cost of equity. The proportion of debt is provided by debt (/) assets. Since total assets is equal to total debt (+) total equity, the proportion of equity is equal to 1 (debt / assets); basically, the cost of capital is (debt / assets) (x) after-tax cost of debt + (1- debt / assets) (x) the cost of equity. Accordingly, the table is filled in this manner:.
Debt / Assets (AT) Debt Cost Equity Costs Capital Costs
0% 8% 12% 12%
10 8 12 11.6%
20 8 12 11.2%
30 8 13 11.5%
40 9 14 12.0%
50 10 15 12.5%
60 12 16 13.6%
(B)
According to the figures in (A) the most advantageous capital structure is 20-percent debt and 80-percent equity; this structure essentially reduces the cost of capital, and as such, the value of the firm would be elevated. Since total assets equal $100, the amount of debt should be 100 (x) 20%, which equals $20. The amount of equity should be equal to 100 (x) 80%, which equals $80. Please see the chart below:
Solution Description

Week Five – Individual Assignment

University of Phoenix

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