Which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure? Debt ratio = 70%; equity ratio = 30% O Debt ratio = 40%; equity ratio = 60% O Debt ratio = 60%; equity ratio = 40% O Debt ratio = 50%; equity ratio = 50% Debt ratio = 30%; equity ratio = 70% 0000O
Which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure? Debt ratio = 70%; equity ratio = 30% O Debt ratio = 40%; equity ratio = 60% O Debt ratio = 60%; equity ratio = 40% O Debt ratio = 50%; equity ratio = 50% Debt ratio = 30%; equity ratio = 70% 0000O
Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Eugene F. Brigham, Joel F. Houston
Chapter14: Capital Structure And Leverage
Section: Chapter Questions
Problem 14SP: WACC AND OPTIMAL CAPITAL STRUCTURE Elliott Athletics is trying to determine its optimal capital...
Related questions
Question
Please state the correct answers
![9. 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
rd
rs
WACC
30%
70%
6.02%
9.40%
9.71%
40%
60%
6.75%
9.750%
9.55%
50%
50%
7.15%
10.60%
10.02%
60%
40%
7.55%
11.30%
10.78%
70%
30%
8.24%
12.80%
11.45%
Which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure?
Debt ratio =
70%; equity ratio = 30%
Debt ratio =
40%; equity ratio = 60%
Debt ratio
60%; equity ratio = 40%
Debt ratio =
50%; equity ratio = 50%
Debt ratio =
30%; equity ratio = 70%
Consider this case:
Globex Corp. currently has a capital structure consisting of 40% debt and 60% 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 8%, and Globex Corp.'s beta is 1.10.
If the firm's tax rate is 45%, what will be the beta of an all-equity firm if its operations were exactly the same?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8e241797-399b-4dac-ab9c-2b3b625a3d13%2Fb79ccbf6-597c-4cdf-945f-be47c3ba1bd0%2Fdvijfm7_processed.png&w=3840&q=75)
Transcribed Image Text:9. 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
rd
rs
WACC
30%
70%
6.02%
9.40%
9.71%
40%
60%
6.75%
9.750%
9.55%
50%
50%
7.15%
10.60%
10.02%
60%
40%
7.55%
11.30%
10.78%
70%
30%
8.24%
12.80%
11.45%
Which capital structure shown in the preceding table is Transworld Consortium Corp.'s optimal capital structure?
Debt ratio =
70%; equity ratio = 30%
Debt ratio =
40%; equity ratio = 60%
Debt ratio
60%; equity ratio = 40%
Debt ratio =
50%; equity ratio = 50%
Debt ratio =
30%; equity ratio = 70%
Consider this case:
Globex Corp. currently has a capital structure consisting of 40% debt and 60% 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 8%, and Globex Corp.'s beta is 1.10.
If the firm's tax rate is 45%, what will be the beta of an all-equity firm if its operations were exactly the same?
![If the firm's tax rate is 45%, 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
10%, and its tax rate is 45%. It currently has a levered beta of 1.10. The risk-free rate is 3.5%, and the risk
premium on the market is 8%.
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%. 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?
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 EPS.
O The optimal capital structure minimizes the firm's WACC.
The optimal capital structure minimizes the firm's cost of equity.
The optimal capital structure maximizes the firm's stock price.
The optimal capital structure minimizes the firm's cost of debt.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8e241797-399b-4dac-ab9c-2b3b625a3d13%2Fb79ccbf6-597c-4cdf-945f-be47c3ba1bd0%2Fm89f7_processed.png&w=3840&q=75)
Transcribed Image Text:If the firm's tax rate is 45%, 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
10%, and its tax rate is 45%. It currently has a levered beta of 1.10. The risk-free rate is 3.5%, and the risk
premium on the market is 8%.
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%. 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?
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 EPS.
O The optimal capital structure minimizes the firm's WACC.
The optimal capital structure minimizes the firm's cost of equity.
The optimal capital structure maximizes the firm's stock price.
The optimal capital structure minimizes the firm's cost of debt.
Expert Solution
![](/static/compass_v2/shared-icons/check-mark.png)
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![Fundamentals Of Financial Management, Concise Edi…](https://www.bartleby.com/isbn_cover_images/9781337902571/9781337902571_smallCoverImage.jpg)
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![Fundamentals Of Financial Management, Concise Edi…](https://www.bartleby.com/isbn_cover_images/9781337902571/9781337902571_smallCoverImage.jpg)
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![EBK CONTEMPORARY FINANCIAL MANAGEMENT](https://www.bartleby.com/isbn_cover_images/9781337514835/9781337514835_smallCoverImage.jpg)
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781285867977/9781285867977_smallCoverImage.gif)
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781285867977
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
![Survey of Accounting (Accounting I)](https://www.bartleby.com/isbn_cover_images/9781305961883/9781305961883_smallCoverImage.gif)
Survey of Accounting (Accounting I)
Accounting
ISBN:
9781305961883
Author:
Carl Warren
Publisher:
Cengage Learning