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.

Debt Ratio

Equity Ratio

rd

rs

WACC

$30\%70\%6\mathrm{.}02\%9\mathrm{.}40\%9\mathrm{.}71\%$

$40\%60\%6\mathrm{.}75\%9\mathrm{.}750\%9\mathrm{.}55\%$

$50\%50\%7\mathrm{.}15\%10\mathrm{.}60\%10\mathrm{.}02\%$

$60\%40\%7\mathrm{.}55\%11\mathrm{.}30\%10\mathrm{.}78\%$

$70\%30\%8\mathrm{.}24\%12\mathrm{.}80\%11\mathrm{.}45\%$

Which capital structure shown in the preceding table is Transworld Consortium Corp.$$s optimal capital structure?

Debt ratio $=40\%$; equity ratio $=60\%$

Debt ratio $=50\%$; equity ratio $=50\%$

Debt ratio $=60\%$; equity ratio $=40\%$

Debt ratio $=70\%$; equity ratio $=30\%$

Debt ratio $=30\%$; equity ratio $=70\%$

Consider this case:

Globo$-$Chem Co$.$ has a capital structure that consists of $30\%$ debt and $70\%$ equity. The firm$$s current beta is $1\mathrm{.}15,$ but management wants to understand Globo$-$Chem Co$.$s market risk without the effect of leverage.

If Globo$-$Chem Co$.$ has a $45\%$ tax rate, what is its unlevered beta?

$0\mathrm{.}93$

$1\mathrm{.}07$

$0\mathrm{.}88$

$0\mathrm{.}98$

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 $45\%.$ It currently has a levered beta of $1\mathrm{.}15.$ The risk$-$free rate is $2\mathrm{.}5\%,$ 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$$s level of debt will cause its before$-$tax cost of debt to increase to $8\%.$ Use the Hamada equation to unlever and relever the beta for the new level of debt. What will the firm$$s weighted average cost of capital $($WACC$)$ be if it makes this change in its capital structure? $($Hint: Do not round intermediate calculations.$)$

Which of the following statements regarding a firm$$s optimal capital structure are true? Check all that apply.

The optimal capital structure minimizes the firm$$s WACC.

The optimal capital structure maximizes the firm$$s EPS.

The optimal capital structure maximizes the firm$$s stock price.

The optimal capital structure minimizes the firm$$s cost of equity.

The optimal capital structure minimizes the firm$$s cost of debt.

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