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Chrome File Edit View History Bookmarks People Window Help Cengage x >,:-MindTap-Cengage Learning C ng.cengage.com/static/nb/ui/index.html?nbld-595499&nbNodeld-21; 7344220&eISBN-9781; . MINDTAP Chapter Review 13-Capital Structure and Leverage Due on Nov 30 at 11:59 PM PST ow corsoerme case or anoner U.S. 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 45%. It currently has a levered beta of 1.25·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 12%. First, solve for us. Robotics Inc.'s unlevered beta.[ 1.01 Relever us. Robotics Inc.'s beta using the firm's new capital structure. Use U.S. 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 9.3% 10.9% 12.0% 8.7% 2013 cengage Learing exceptasted Al ights reserved Continue without saving

Explanation / Answer

Unlevered beta = Levered beta / (1 + (1 - tax) x D/E) = 1.25 / (1 + (1 - 45%) x 30/70) = 1.01

Levered beta = Unlevered beta x (1 + (1 - tax) x D/E) = 1.01 x (1 + (1 - 45%) x 60/40) = 1.85

Using CAPM, Cost of equity, ke = Rf + beta x MRP = 3.5% + 1.85 x 7.5% = 17.35%

WACC = wd x kd x (1 - tax) + we x ke = 60% x 12% x (1 - 45%) + 40% x 17.35% = 10.9%

where, wd - weight of debt, kd - cost of debt, we - weight of equity and ke - cost of equity

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