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-   -   Constructing a pro forma balance sheet (https://www.askmehelpdesk.com/showthread.php?t=317991)

  • Feb 16, 2009, 09:43 AM
    ktmf07
    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.
  • Feb 16, 2009, 09:45 AM
    ktmf07

    Sorry everyone I guess the listed chart in the first part of the question didn't come out right but the numbers that go across correspond with the headings above... I was able to figure out that part though, I'm just unsure how to find the optimal capital structue of the Debt and Equity calculations and was wondering how to do them. Thank you.

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