Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Globex Corp, is an all-equity firm, and it has a beta of 1 . It is considering changing its capital structure to 70 equity and
Globex Corp, is an all-equity firm, and it has a beta of 1 . It is considering changing its capital structure to \70 equity and \30 debt. The firm's cost of debt will be \8, and it will face a tax rate of \45. What will Globex Corp.'s beta be if it decides to make this change in its capital structure? 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 \8, and its tax rate is \45. It currently has a levered beta of 1.15 . The risk-free rate is \3.5, 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-t cost of debt to increase to \10. 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
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started