A firm’s optimal capital structure report depends on its balance sheet’s debt and equity mix.
A firm’s cost of capital is based on the rates of its sources of capital. Propose the optimal capital structure for both firms, and calculate the mathematical effect of the proposal on the weighted average cost of capital (WAAC). Complete the following:
Calculate the cost of equity, the cost of preferred stock, and the cost of debt for the two firms chosen.
Compute the weighted average cost of capital for each firm.
Evaluate whether the rates calculated are too high or too low based on the financial statements.
Determine if the firm is operating at an optimal capital structure.
