marks People Window Help x Aplia: Student Questionx xG consider the case of Galf
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marks People Window Help x Aplia: Student Questionx xG consider the case of Galfriath x courses.aplia.com/af/servlet/quiz?quiz action-takeQuiz&quiz;_probGuid QNAPCOA8010100000041ca26100700008t 4. Determining the optimal capital structure Aa Aa Understanding the optimal capital structure Review this situation: Universal 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 EPS DPS Stock Price 30% 40% 50% 60% 70% 70% 1.25 0.55 36.25 60% 1.40 0.60 37.75 50% 1.60 0.65 39.50 40% 1.8S 0.75 38.75 30% 1.750.70 38.25 pital structure shown in the preceding table is Universal Exports Inc. s optimal capital structure? Debt ratio-30%; equity ratio-7096 0 Debt ratio-50%; equity ratio-50% Debt ratio-40%; equity ratio-60% Debt ratio-70%; equity ratio-30% Debt ratio-60%; equity ratio-40% Consider this case: Globex Corp. 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 6%, and it wil tace a tax rate of 40% what will Giobex Corp.'s beta be if it decides to make this change in its capital structure? Now consider the case of another company: MacBook AirExplanation / Answer
4
Optimal capital structure is that which creat maximum shareholdder wealth. Therefore 50 % equity and 50 % debt is optimal capital structure.
Option B is correct.
5.
Levered beta = unlevered beta {1+ D/E (1-Tax) }
= 1 * (1 + 0.2571)
= 1.257
6.
Unlevered Beta = Levered Beta / 1+ D/E (1-tax)
= 1.25 / 1+ 0.2571
= 1
Levered beta = 1 * 1+0.9
= 1.9
Cost of equity = Rf + (Rm-Rf) Beta
= 3 % + (7.5% * 1.9 )
= 17.25 %
WACC = 60% * 4.8 + 40 % * 17.25
= 9.78 %
Option B is correct.
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