4. Determining the optimal eapital structure Understanding the optimal capital structure Aevew this situation: Universal Euports Inc. is trying to identify its octimal capital structure. Universal Exports Inc. has gathered the following financlai infectuacien to help with the anaivisis. Which capital structure shown in the preceding table is Universal Exports lnei's optimal capital structure? Debt ratio 30%; equity ratio =70% Debt fatio =70%; equity ratio = 30% Debt ratio =50%; equity rato =50% Deiot ratio =60%; equity ratio =40% Debt ratio =40%, eculty ratio =6049 Ch.13: Assignmens - Capital 5 tructure and Leverage Corasider this casei 1,25 . reer Success Tips If the firm's tax rate is 25\%, nhat will be the beea of an all-equiny fim \& ts operabons were exactly the same? Now censider the case of another company: US Robotics Inci has a current copital structure of 30% debt and 7ow equity. Its current bedere-tax cost of debt is a\%s, and ta tax rate is 25\%. It currently has a levered beta of 1:25. The risk-tree rate is 3.5%, and the risk premium on the market of 7 W. US Robcbies ineis cansidering chariging its capital structure to 60% debe and 404 equty. Increasing the fim's level of debt will cause ks betore-tak cost of debt to increase to 10% : is 25\%. It currently has a levered beta of 1.25. The nisk-free rate is 3.5%, and the risk premium on the market is 7. Lis Rabiscs inc is considering changing its capital structure to 60% debe and 40% equty tincreasing the firm's level of debt wit cause it before tax cast of debt to increase to 10%. First, sove for US Robotics inc's unlevered beta. Use US Robotics incis unlevered beta to solve for the firm's levered beta with the new capital structure. Use US Robotics Inci's levered beta under the new capital structure, to solve for its cost of equty unser the new capital structure. What will the firm's weighted average cost of capital (WACC) be it it makes this change in its capital structure? 9.86% 11.60% 9.28%= 11.02%