## BA 490 Discussion Forum – Ford’s Profitability

In Strategy Capsule 2.3 (Chapter 2), we observed that Ford’s profitability was low primarily because its costs were high. Using the value chain shown in Figure 8.4 and what you know about Ford (including the information in Strategy Capsule 2.3), what suggestions would you offer as to how Ford might lower its costs of producing cars?

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## BA 470 Assessment – Debt and Equity

BA 470 Assessment – Debt and Equity

1. Define capital, describe the three basic types of capital small businesses require, and give an example of how each is used.

2. Explain the difference between equity capital and debt capital. What advantages and disadvantages characterize each?

3. Discuss the various sources of information available to the small business owner for deciding in which region of the country to locate her business.

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## FIN 370 Week 5 Problem 3

FIN 370 Week 5 Problem 3

A firm’s current balance sheet is as follows:

Assets \$100                        Debt                               \$10

Equity                             \$90

a. What is the firm’s weighted-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                                    ?

b. Construct a pro forma balance sheet that indicates the firm’s optimal capital structure. Compare this balance sheet with the firm’s current balance sheet.

What course of action should the firm take?

Assets                                 \$100                       Debt                             \$?

Equity                          \$?

c. As a firm initially substitutes debt for equity financing, what happens to the cost of capital, and why?

d. If a firm uses too much debt financing, why does the cost of capital rise?