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 rdrd rsrs 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 Transworld Consortium Corp.’s optimal capital structure? Debt ratio = 70%; equity ratio = 30% Debt ratio = 60%; equity ratio = 40% Debt ratio = 40%; equity ratio = 60% Debt ratio = 30%; equity ratio = 70% Debt ratio = 50%; equity ratio = 50%
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 rdrd rsrs 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 Transworld Consortium Corp.’s optimal capital structure? Debt ratio = 70%; equity ratio = 30% Debt ratio = 60%; equity ratio = 40% Debt ratio = 40%; equity ratio = 60% Debt ratio = 30%; equity ratio = 70% Debt ratio = 50%; equity ratio = 50%
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 4P
Related questions
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
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
|
rdrd
|
rsrs
|
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 Transworld Consortium Corp.’s optimal capital structure?
Debt ratio = 70%; equity ratio = 30%
Debt ratio = 60%; equity ratio = 40%
Debt ratio = 40%; equity ratio = 60%
Debt ratio = 30%; equity ratio = 70%
Debt ratio = 50%; equity ratio = 50%
Consider this case:
Globo-Chem Co. 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 Globo-Chem Co.’s market risk without the effect of leverage.
If Globo-Chem Co. has a 35% tax rate, what is its unlevered beta?
0.98
0.88
0.83
1.03
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 35%. It currently has a levered beta of 1.25. The risk-free rate is 3%, 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?
7.3%
7.9%
11.3%
9.0%
Expert Solution
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
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
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Fundamentals Of Financial Management, Concise Edi…
Finance
ISBN:
9781337902571
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Financial Reporting, Financial Statement Analysis…
Finance
ISBN:
9781285190907
Author:
James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:
Cengage Learning
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781285867977
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning