# Week 5 - Individual Assignment - 89457

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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:
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Week Five – Individual Assignment

University of Phoenix

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