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Understanding the optimal capital structure Review this situation: Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the
Understanding the optimal capital structure 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
Which capital structure shown in the preceding table is Transworld Consortium Corp.s optimal capital structure?
Debt ratio ; equity ratio
Debt ratio ; equity ratio
Debt ratio ; equity ratio
Debt ratio ; equity ratio
Debt ratio ; equity ratio
Consider this case: GloboChem Co has a capital structure that consists of debt and equity. The firms current beta is but management wants to understand GloboChem Cos market risk without the effect of leverage.
If GloboChem Co has a tax rate, what is its unlevered beta?
Now consider the case of another company: US Robotics Inc. has a current capital structure of debt and equity. Its current beforetax cost of debt is and its tax rate is It currently has a levered beta of The riskfree rate is and the risk premium on the market is US Robotics Inc. is considering changing its capital structure to debt and equity. Increasing the firms level of debt will cause its beforetax cost of debt to increase to
First, solve for US Robotics Inc.s unlevered beta.
Use US Robotics Inc.s unlevered beta to solve for the firms 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 under the new capital structure.
What will the firms weighted average cost of capital WACC be if it makes this change in its capital structure?
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