Consider this case: Globex Corp. currently has a capital structure consisting of 30% debt and 70 % equity. However, Globex Corp.'s CFO has suggested that the firm increase its debt ratio to 50%. The current risk-free rate is 3.5%, the market risk premium is 7.5%, and Globex Corp.'s beta is 1.15. If the firm's tax rate is 25%, what will be the beta of an all-equity firm if its operations were exactly the same?
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- Now consider the case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%, and its tax rate is 45%. It currently has a levered beta of 1.15. 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%. Use the Hamada equation to unlever and relever the beta for the new level of debt. What will the firm's weighted average cost of capital (WACC) be if it makes this change in its capital structure? (Hint: Do not round intermediate calculations.) Which of the following statements regarding a firm's optimal capital structure are true? Check all that apply. The optimal capital structure maximizes the firm's stock price. The optimal capital structure maximizes the firm's EPS. The optimal capital structure…Consider this case: Globo-Chem Co. currently has a capital structure consisting of 35% debt and 65% equity. However, Globo-Chem Co.'s CFO has suggested that the firm increase its debt ratio to 50%. The current risk-free rate is 3%, the market risk premium is 7.5%, and Globo- Chem Co.'s beta is 1.25. If the firm's tax rate is 35%, what will be the beta of an all-equity firm if its operations were exactly the same? Now consider the case of another company: U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 8%, and its tax rate is 35%. It currently has a levered beta of 1.25. The risk-free rate is 3%, 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 10%. Use the Hamada equation to unlever and relever the beta for the new level of debt. What will…9. Determining the optimal capital structure Aa Aa 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. Debt Ratio Equity Ratio rd rs WACC 30% 70% 7.00% 10.50% 8.61% 40% 60% 7.20% 10.80% 8.21% 50% 50% 7.70% 11.40% 8.01% 60% 40% 8.90% 12.20% 8.08% 70% 30% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 40%; equity ratio = 60% Debt ratio 50%; equity ratio = 50% Debt ratio = 70%; equity ratio 30% Debt ratio = 30%; equity ratio = 70% Debt ratio = 60%; equity ratio = 40% Consider this case: Globo-Chem Co. 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 8%, and it will face a tax rate of 40%.
- Consider this case: Globex Corp. has a capital structure that consists of 30% debt and 70% equity. The firm’s current beta is 1.25, but management wants to understand Globex Corp.’s market risk without the effect of leverage. If Globex Corp. has a 25% tax rate, what is its unlevered beta? 0.90 0.81 1.09 0.95Review 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. Debt Ratio Equity Ratio 70% 30% 40% 60% 50% 50% 60% 40% 70% 30% T 6.02% Consider this case: 4₂ 9.40% 6.75% 9.750% 7.15% 10.60% 10.02% 7.55% 11.30% 10.78% 8.24% 12.80% 11.45% WACC 9.71% 9.55% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? O Debt ratio- 70%; equity ratio -30% O Debt ratio-60%; equity ratio- 40% O Debt ratio-30%; equity ratio = 70% O Debt ratio 50%; equity ratio 50% O Debt ratio-40%; equity ratio- 60% 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 6%, 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…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 8%, and its tax rate is 25%. It currently has a levered beta of 1.25. The risk-free rate is 3.5%, 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 10%. 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? 11.78% 12.40% 8.06% 9.30%
- An all equity financed company currently has a beta of 1.2 and a marginal tax rate of 20%. The expected return on the market is 8%. The risk-free rate of return is 3%. The company's before-tax cost of debt is 5%. The company decides to alter its capital structure and will target 50% debt, which will remain constant. What is this company's new weighted average cost of capital (WACC)? a) 6.5% b) 7.7% c) 8.9% d) 10.2%Globex Corp. is an all-equity firm, and it has a beta of 1. It 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 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 curre is 25%. It currently has a levered beta of 1.15. The risk-free rate is 3.5%, and the risk 1.65 1.58 1.80 1.50 e-tax cost of debt is 6%, and its tax rate m on the market is 7.5%. US RoboticsDigital Solutions Inc. has a capital structure of 40% debt and 60% equity, its tax rate is 30%, and its levered beta, b, is estimated to be 1.35. A financial analyst for Digital Solutions wants to estimate what the company's unlevered beta, bu, would be if it used no debt. Assume that the analyst will use the Hamada equation to determine the unlevered beta, what would be the estimate for bu? Note: bu b₁/[1 + (1 -T) x (D/E)]. = O 0.92 O 0.76 0.82 0.99
- Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6 percent and the market risk premium, rM - rRF, is 5 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. Find the new levered beta given the new capital structure (if it were to change its capital structure to 50 percent debt and 50 percent equity) using the Hamada equation. O 1.67 O 0.81 O 1.00 O 1.22 O 1.459. Determining the optimal capital structure Aa Aa 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% 70% 1.55 0.34 22.35 40% 60% 1.67 0.45 24.56 50% 50% 1.72 0.51 25.78 60% 40% 1.78 0.57 27.75 70% 30% 1.84 0.62 26.42 Which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure? Debt ratio 50%; equity ratio 50% Debt ratio = 30%; equity ratio = 70% Debt ratio 70%; equity ratio 30% Debt ratio = 40%; equity ratio = 60% Debt ratio 60%; equity ratio = 40% Consider this case: Globex Corp. has a capital structure that consists of 30% debt and 70% equity. The firm's current beta is 1.15, but management wants to understand Globex Corp.'s market risk without the effect of leverage. If Globex Corp. has…Globo-Chem Co. 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 Globo-Chem Co.'s beta be if it decides to make this change in its capital structure? 1.82 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%. It currently has a levered beta of 1.15. The risk-free rate is 2.5%, and the risk premium on the market is 7.5%. 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…