Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

image text in transcribed
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 EPS DPS Stock Price 30% 40% 50% 60% 70% 70% 1.250.55 36.25 60% 1.40 0.60 37.75 50% 1.60 0.65 39.50 409% 1.85 0.75 38.75 30% 1.75 0.70 38.25 which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure? Debt ratio = 6096; equity ratio-40% O Debt ratio = 40%; equity ratio = 60% Debt ratio = 30%; equity ratio-70% O Debt ratio-50%; equity ratio = so% o Debt ratio-70%; equity ratio= 30% Consider this case: Globex corp. is an all-equity firm, and it has a beta of 1, t is considering changing its capital structure to 60% equity and 40% debt. The firm's cost of debt will be 6%, and it will face a tax rate of 45%. what will Globex corp 's beta be if it dedides to make this change in its capital structure? Now consider the case of another company: US. Robotics Inc. has a current capital structure of 30% debt and 70% equity, ts current before-tax cost of debt is 6%, and its tax rate s 45% it currently has a levered beta of 1.25. The risk-free rate is 3.5%, and the risk premium on the market is 7.5%. 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%. First, solve for us. Robotics Inc.'s unlevered beta. D Reever us. Robotics Inc's beta using the fimms new capital structure.] use u.S. 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 if it makes this change in its capital structure: 8,296 10.6% 9.1% 96%

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

The Essentials Of Machine Learning In Finance And Accounting

Authors: Mohammad Zoynul Abedin, M. Kabir Hassan, Petr Hajek, Mohammed Mohi Uddin

1st Edition

0367480816, 978-0367480813

More Books

Students also viewed these Finance questions

Question

List the different categories of international employees. page 642

Answered: 1 week ago

Question

Explain the legal environments impact on labor relations. page 590

Answered: 1 week ago