Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Understanding the optimal capital structure Review this situation Universal Exports Inc. is trying to identify is optimal capital structure Universal Exports Inc. has gathered the

image text in transcribed

Understanding the optimal capital structure Review this situation Universal Exports Inc. is trying to identify is optimal capital structure Universal Exports Inc. has gathered the following financial information to help with the analysis Debt Ratio Equity Ratio 30% 7046 40% 6046 50% 50% 60% 70% 30% WACC 7.00 10.50% 8.61% 7.204 10.80 8.21% 7.70% 11.408.01% 8.90% 12.20 8.00 10.30 13.50 8.8% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debelo - 40% equity ratio -60% O Debt ratio = 30; equity ratio - 20% O Debt ratio -70%; equity ratio - 20% O Debt ratio -50% equity ratio -40% O Debit ratio -50%; quity - 50% Consider this case Globex Corp. is an all-equity firm, and it has a bit of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 8%, and it will face a tax rate of 25%. What will Globex Carpsbela 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 debtis 8%, and its tax rate is 25%. It currently has a vered bota of 1.25. The risk-free rate is 3.5%, and the risk premium on the market i 8. US Robotics Inc. is considering changing its capital structure to 60% debt and 20% equity. Increasing the fem level of date will cause its before-tax cost of debt to increase to 10% Fest, solve for us Robotics Inc.Seved bata. - use us Robotics Inc.'s unkvered beta to solve for the firm's red but with the capital structure use us Robotics Inc.'Sivered bta under the 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 makes this change in its capital structure? 0 12.40

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

Finance For IT Decision Makers

Authors: Michael Blackstaff

1st Edition

3540762329, 978-3540762324

More Books

Students also viewed these Finance questions