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 $1\mathrm{.}25.$ The risk$-$free rate is $2\mathrm{.}5\%,$ and the risk premium on the market is $8\%.$

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.$)$

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