Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. EPS DPS Debt Ratio 30% Equity Ratio 70% Stock Price 36.25 1.25 0.55 40% 60% 1.40 37.75 0.60 0.65 50% 50% 1.60 39.50 60% 40% 1.85 0.75 38.75 70% 30% 1.75 0.70 38.25 Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? O Debt ratio = 50%; equity ratio = 50% Debt ratio = 70% equity ratio = 30% O Debt ratio = 30%; equity ratio = 70% Debt ratio = 60%; equity ratio = 40% O Debt ratio = 40%; equity ratio = 60% Consider this case: Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 10%, and it will face a tax rate of 25%. . What will Globex Corp.'s beta be if it decides 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. Its current before-tax cost of debt is 10%, and its tax rate is 25%. currently has a levered beta of 1.25. The risk-free rate is 3.5%, and the risk premium on the market is 7%. 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 12%. 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 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? O 8.13% O 12.50% O 8.75% 0 7.50% Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. EPS DPS Debt Ratio 30% Equity Ratio 70% Stock Price 36.25 1.25 0.55 40% 60% 1.40 37.75 0.60 0.65 50% 50% 1.60 39.50 60% 40% 1.85 0.75 38.75 70% 30% 1.75 0.70 38.25 Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? O Debt ratio = 50%; equity ratio = 50% Debt ratio = 70% equity ratio = 30% O Debt ratio = 30%; equity ratio = 70% Debt ratio = 60%; equity ratio = 40% O Debt ratio = 40%; equity ratio = 60% Consider this case: Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 10%, and it will face a tax rate of 25%. . What will Globex Corp.'s beta be if it decides 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. Its current before-tax cost of debt is 10%, and its tax rate is 25%. currently has a levered beta of 1.25. The risk-free rate is 3.5%, and the risk premium on the market is 7%. 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 12%. 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 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? O 8.13% O 12.50% O 8.75% 0 7.50%
