Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

US Robotics Ine. has a current capital structure of 30% debt and 70% equily. Its current before-tax cost of debt is 10%, and its tax

image text in transcribed
US Robotics Ine. has a current capital structure of 30% debt and 70% equily. Its current before-tax cost of debt is 10%, and its tax rate $25%, It currently has a levered beta of 1.15 . The risk-free rate is 3%, and the risk premium on the market is 8%. 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%. Fint, solve for US Roboties 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 Rabotic incis 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? 12.50% 8.75% 10.00% 9,38%

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_2

Step: 3

blur-text-image_3

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

Financial Management In The Public Sector Tools Applications And Cases

Authors: Xiaohu Wang

2nd Edition

0765625229, 9780765625229

More Books

Students also viewed these Finance questions