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 rateis 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-taxcost 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 weightedaverage 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 minimizes the firm's cost of equity.The optimal capital structure minimizes the firm's WACC.The optimal capital structure minimizes the firm's cost of debt.6.0%5.5%9.2%8.7%

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%. 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 st 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 erage cost of capital (WACC) be if it makes this change in its capital structure? (Hint: Do not round intermediate calculations.) hich 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 6.0% 5.5% 9.2%

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%. 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 st 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 erage cost of capital (WACC) be if it makes this change in its capital structure? (Hint: Do not round intermediate calculations.) hich 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 6.0% 5.5% 9.2%

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Cost of Debt, Cost of Preferred Stock

This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.

Cost of Common Stock

Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity

Question

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 minimizes the firm's cost of equity.
The optimal capital structure minimizes the firm's WACC.
The optimal capital structure minimizes the firm's cost of debt.
6.0%
5.5%
9.2%
8.7%

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Clifford Chance is a large U.K. firm with the before tax cost of debt of 10%. The risk-free rate of interest on 10-year Treasury bonds is 4%. The expected return on the market portfolio is 8%. After effective taxes, Clifford Chance’s effective tax rate is 20%. Its optimal capital structure is 70% debt and 30% equity. If Clifford Chance’s beta is estimated at 1.5, what is its weighted average cost of capital? (4 marks) This firm has collected 50,000 GBP from U.K. stock and bond markets by using the weighted average cost of capital calculated in step (a). It has invested this fund on a 3-year project in U.K. and earned the cash flows of 10,000, 15,000, and 20,000 for the first, second, and third years of the project, respectively. Calculate Net Present Value of the project and provide a decision whether this project is acceptable for investment?
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Orion is financed with 26% debt and the rest equity. Orion has an equity beta of 1.2, a debt beta of 0 and a marginal tax rate of 26%.If Orion issues debt to repurchase equity so that the new firm is now 52% debt, what will be its new equity beta? (Continue to assume the debt beta remains at 0.)
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 Robotics
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