9. Determining the optimal capital structure Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure, Universal Exports Inc. has gathered the following financial information to help with the analysis. Debt Ratio EPS DPS Equity Ratio 70% Stock Price 36.25 30% 1.25 0.55 40% 60% 1.40 0.60 37.75 50% 50% 1.60 0.65 39.50 60% 40% 1.85 0.75 38.75 70% 30% 1.75 0.70 38.25 Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 40%; equity ratio = 60% Debt ratio - 60%; equity ratio = 40% Debt ratio -70%; equity ratio = 30% Debt ratio = 50%, equity ratio -50% Debt ratio = 30%; equity ratio = 70% Consider this case: Globex Corp. has a capital structure that consists of 40% debt and 60% equity. The firm's current beta is 1.10, but management wants to understand Globex Corp.'s market risk without the effect of leverage. If Globex Corp. has a 40% tax rate, what is its unlevered beta? O 0.83 O 0.75 O 0.79 O 0.71 Now consider the case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 10%, and its tax rate is 40%. It currently has a levered beta of 1.10. The risk-free rate is 3%, and the risk premium on the market is 7%. U.S. Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before ta cost of debt to increase to 12%. Use the Hamada equation to unlever and relever the beta for the new level of debt. What will the firm's weighted average cost of capital (WACC) be if it makes this change in its capital structure? (Hint: Do not round Intermediate calculations.) U.S. Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firm's level of debt will cause its before-tax cost of debt to increase to 12%. Use the Hamada equation to unlever and relever the beta for the new level of debt. What will the firm's weighted average cost of capital (WACC) be if it makes this change in its capital structure? (Hint: Do not round intermediate calculations.) Which of the following statements regarding a firm's optimal capital structure are true? Check all that apply. 7.1% 8.2% The optimal capital structure maximizes the firm's stock price. The optimal capital structure minimizes the firm's WACC. 7.7% 10.2% The optimal capital structure minimizes the firm's cost of debt. The optimal capital structure minimizes the firm's cost of equity. The optimal capital structure maximizes the firm's EPS
