Drop down answer choices:

1. 7.5%, 10.3%, 8.9%, 9.4%

2. maximizes or minimizes

3. maximizes or minimizes

4. increases or decreases

5. increases or decreases

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 Equity Ratio EPS DPS Stock Price 30% 70% 1.25 0.55 36.25 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? O Debt ratio = 60%; equity ratio = 40% O Debt ratio = 30%, equity ratio = 70% O Debt ratio = 50%; equity ratio = 50% O Debt ratio = 70%, equity ratio = 30% Debt ratio = 40%; equity ratio = 60% Consider this case: Globex Corp. has a capital structure that consists of 30% debt and 70% 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 35% tax rate, what is its unlevered beta? O 0.99 O 0.86 O 1.03 O 0.90 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 6%, and its tax rate is 35%. It currently has a levered beta of 1.10. The risk-free rate is 3%, 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 firm's 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 firm's weighted average cost of capital (WACC) be if it makes this change in its capital structure? (Hint: Do not round intermediate calculations.) The optimal capital structure is the one that the WACC and the firm's stock price. Higher debt levels the firm's risk. Consequently, higher levels of debt cause the firm's cost of equity to