Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis. DPS Stock Price 0.34 0:45 Debt Ratio Equity Ratio EPS 30% 70% 1.55 40% 60% 1.67 50% 50% 1.72 60% 4046 1.78 70% 30% 1.84 22.35 24.56 25.78 0.51 0.57 0.62 27.75 26.42 which capital structure shown in the preceding table is Transworld Consortium Corp's optimal capital structure Debt ratio = 30%; equity ratio - 70% Debt ratio = 50%; equity ratio - 50% Debt ratio -70%; equity ratio -30% Debt ratio 40%; equity ratio = 60% Debt ratio -60%, equity ratio 40% Globex Corp. currently has a capital structure consisting of 30% debt and 70% equity. However, Globex Corp.'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 8%, and Globex Corp.'s beta is 1.15. If the firm's tax rate is 25%, what will be the beta of an all-equity firm if its operations were exactly the same? Now consider the case of another company: US 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 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk premium on the market 4. US 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 10% First, solve for us Robotics Inc's unlevered beta. Use US Robotics Inc.'s unlevered beta to solve for the firm's levered beta with the new capital structure. Use US Robotics Inc.'s fevered beta under the new capital structure, to solve for its cost of equity under the new capital structure. What will the What will the firm's weighted average cost of capital (WACC) be if it makes this change in its capital structure? 11.21% 12.98% 11.80% 7.67% Globex Corp. currently has a capital structure consisting of 30% debt and 70% equity. However, Globex Corp.'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 8%, and Globex Corp.'s beta is 1.15. If the firm's tax rate is 25%, what will be the beta of an all-equity firm if its operations were exactly the same? Now consider the case of another company: 1.00 1.04 0.87 US Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of 96, and its tax rate 0.74 is 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk premium on the mar 6. US Robotics Inc is considering changing its capital structure to reht and 409 Iormurinn is 25%. It currently has a levered beta of 1.15. The risk-free rate is 3. is considering changing its capital structure to 60% debt and 40% equ of debt to increase to 10%. First, solve for US Robotics Inc.'s unlevered beta. Use US Robotics Inc.'s unlevered beta to solve for 0.96 's levered beta w Use US Robotics Inc.'s levered beta under the new 0.78 structure, to solv 0.87 What will the firm's weighted average cost of capit 1.04 fc) be if it makes 11.21% Use US Robotics Inc.'s unlevered beta to solve for the firm's levered beta with the new capital structure. Use US Robotics Inc.'s levered beta under the new capital structure, to solve for its cost of equity undert 1.85 tapital structure 1.76 What will the firm's weighted average cost of capital (WACC) be if it makes this change in its capital strud 1.67 11.21% 2.04 Ust US Robotics Inc.'s levered beta under the new capital structure, to solve for its cost of equity under the new capital structure What will the firm's weighted average cost of capital (WACC) be it it makes this change in its capital structure? 21.0459 11.219 16.470% 12.95 14.640% 11.50 18.300% 7.67%
