Constructing a pro forma balance sheet
Hello, I had a question that I'm having trouble with in my finance class and was hoping for some direction. The question is as follows
A firm's current balance sheet is as follows:
Assets $100 Debt $10
Equity $90
a. What is the firm's weight average cost of capital at various combinations of debt and equity, given the following information?
Debt/Assets After-Tax Cost of Debt Cost of Equity Cost of Capital
0% 8% 12% ?
10 8 12 ?
20 8 12 ?
30 8 13 ?
40 9 14 ?
50 10 15 ?
60 12 16 ?
I was able to figure this out correctly I believe, I put the answers I got below
a. (0% x 8%) + (100% x 12%) = .120 or 12%
b. (0.10) x (0.08) + (0.90) x (0.12) = 0.116 or 11.6%
c. (0.2)(0.08) + (0.8)(0.12) = 0.112 or 11.2%
d. (0.3)(0.08) + (0.7)(0.13) = 0.115 or 11.5%
e. (0.4)(0.09) + (0.6)(0.14) = 0.120 or 12%
f. (0.5)(0.10) + (0.5)(0.15) = 0.125 or 12.5%
g. (0.6)(0.12) + (0.6)(0.16) = 0.136 or 13.6%
Cost of Capital
a.12%
b 11.6%
c 11.2%
d 11.5%
e 12%
f 12.5%
g 13.6%
I believe those are the answers but, the next part of the question asks me to do the following.
b. Construct a pro forma balance sheet that indicates the firm's optimal capital structure. Compare this balance sheet with the firms current balance sheet. What course of action should the firm take?
Assets $100 Debt $?
Equity $?
How exactly do I do this? Is there a formula for this and if so would someone be able to tell me what the formula is? I'm sorry I'm just slightly confused. Thank you anyone for your help.