Consider the case:

Globo-Chem Co. currently has a capital structure consisting of 30% debt and 70% equity. However, Globo-Chem Co.s CFO has suggested that the firm increase its debt ratio to 50%. The current risk-free rate is 3.5%, the market risk premium is 7.5%, and Globo-Chem Co.s beta is 1.10.

If the firms tax rate is 35%, what will be the beta of an all-equity firm if its operations were exactly the same?

1.03/ 0.77 / 0.69 / 0.86

Now consider the case of another company:

U.S. Robotics Inc. has a current capital structure of 30% and 70% equity. Its current before-tax cost of debt is 6% and its tax rate is 35%. It currently has a levered beta of 1.10. The risk-free rate is 3.5%, and the risk premium on the market is 7.5%.

U.S. Robotics Inc. is considering changing its capital structure to 60% debt and 40% equity. Increasing the firms level of debt will cause its before-tax cost of debt to increase to 8%. Use the Hamada equation to unlever and relever the beta for the new level of debt. What will the firms weighted average cost of capital (WACC) be if it makes this change in its capital structure?

7.7% / 10.6% / 8.2% / 9.6%

The optimal capital structure is the one that maximizes / minimizes the WACC and maximizes / minimizes the firms stock price. Higher debt levels increase / decrease the firms risk. Consequently, higher levels of debt cause the firms cost of equity to increase / decrease. Axis Chemical Co. has found that its expected EPS is maximized at a debt ratio of 45%. Does this mean that Axis Chemical Co.s optimal capital structure calls for 45% debt? Yes / No