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Cengage '. MindTap . Cengage le /index.html ?nbld-59 329 1 &nbNodeld-2; 16270947&elSBN-97813056359; 75 &parenti; MINDTAP Assignment 13-Capital Structure and Leverage Due on Nov 13 at 11 PM EST Understanding the optimal capital structure Review this situation: Unlversal 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 r 30% 40% 50% 60% 70% 70% 60% 50% 40% 30% 6.02% 6.75% 7.15% 7.55% 8.24% 9.40% 9.750% 10.60% 11.30% 12.80% WACC 9.71% 9.55% 10.02% 10.78% 11.45% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio-30%; equity ratio-70% Debt ratio-40%; equity ratio 60% Debt ratio = 60%; equity ratio 40% Debt ratio-50%; equity ratio-50% Debt ratio 70%; equity ratio = 30% 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 70% equity and 30% debt. The firm's cost of debt will be 10%, and it will face a tax rate of 40%. what will Globo-Chem Co.'s beta be if it decides to make this change in its capital structure? O Type here to search

Explanation / Answer

Optimum capital structure is that mix of Debt- Equity that maximises the wealth of shareholders and minimises the cost of Capital(WACC)

here optimum capital structure is Debt(40%) , Equity(60%) with WACC 9.55%

Levered beta = Unlevered beta*1+D/E (1-t)

Here debt is 30%n Equity is 70% i.e., D/E= 3/7

Globo Chems co.Levered Beta= 1{1+{3/7(1-.40)}= 1/1.257= 0.795appx

Robotics Unlevered beta= Levered Beta/ {1+(D/E)(1-t)}= 1.15*{1+(3/7)(1-0.40)}= 1.15/1.2571=0.9148appx

New D/E= 6/4

Levered Beta=  Unlevered Beta* {1+(D/E)(1-t)}= 0.9148*{1+(6/4)(1-0.40)}= 0.9148*1.90=2.076

cost of Equity using CAPM= Rf+ Market risk premium* new levered beta

= 3+(8*2.076)= 19.62%

Kd=I(1-t)= 12(1-0.40)= 7.2%

WACC= 0.6*Kd+0.4*Ke= 0.6*7.2+0.4*19.62= 12.16%

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