Globex Corp. currently has a capital structure consisting of 40% debt and 60% equity. However, Globex...
Fantastic news! We've Found the answer you've been seeking!
Question:
![image text in transcribed](https://s3.amazonaws.com/si.experts.images/answers/2024/05/664927c43b6ef_339664927c379b4a.jpg)
Transcribed Image Text:
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 2.5%, the market risk premium is 7%, and Globex Corp.'s beta is 1.25. D A If the firm's tax rate is 25%, what will be the beta of an all-equity firm if its operations were exactly the same? 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 6%, and its tax rate is 25%. It currently has a levered beta of 1.25. The risk-free rate is 2.5%, and the risk premium on the market is 7%. 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 8%. 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? 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 2.5%, the market risk premium is 7%, and Globex Corp.'s beta is 1.25. D A If the firm's tax rate is 25%, what will be the beta of an all-equity firm if its operations were exactly the same? 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 6%, and its tax rate is 25%. It currently has a levered beta of 1.25. The risk-free rate is 2.5%, and the risk premium on the market is 7%. 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 8%. 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?
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
The indicating instruments with linear scale is Electrostatic instrument a O Thermocouple instrument.bo Dynamometer instrument C PMMC.d O
-
Recently, Pacific Cellular ran a pricing trial in order to estimate the elasticity of demand for its services. The manager selected three states that were representative of its entire service area...
-
The time, \(t\), for oil to drain out of a viscosity calibration container depends on the fluid viscosity, \(\mu\), and density, \(ho\), the orifice diameter, \(d\), and gravity, \(g\). Use...
-
Marketing variance analysis and interpretation Aegean Marine Sales carries several lines of boats and outboard motors. The owner-manager of the company prepared standard sales and cost data for each...
-
Refer to the data in Exercise 1025, regarding Canandaigua Container Company. Prepare journal entries to: In Exercise 1025, Canandaigua Container Company manufactures recyclable soft-drink cans. A...
-
Looking at the picture below, do you think his method of calculating the area is correct? correct? - why incorrect? - why \f
-
MediTech Ltd. Initial Financial Position (31 December 2023): Share capital, authorised and issued: 150,000 8% cumulative preference shares of $1 each: $150,000 600,000 ordinary shares of $1 each:...
-
On a laboratory assignment, if the equipment is working, the density function of the observed outcome, X, is () = (1 ) , 0 < < 1 Determine that renders a valid density function. Calculate ( 1/3)....
-
The payment schedule from the lottery commission is $100,000 after taxes at the end of year one and 19 more payments of exactly $100,000 after taxes in equal annual end of the year deposits (i.e., 20...
-
In May, your bank receives a request from a large company to borrow RM80 million for three months from August. Your bank has agreed to lend the money at KLIBOR plus 0.50%. However, your bank is...
-
Let f(x) = 4-5x+8x2. Calculate the following values: f(a) = f(a + h) = f(a + h) - f(a) h = for h 0
-
Q.1(a) Write down the definitions of broad monetary aggregates (R, M1, M2 and M3) for Pakistan? What does each component of these monetary aggregates represent? (b) Collect annual data on each of the...
-
SunSun TV sells TV sets. It does not sell smart TVs so customers do not come to SunSun TV if they want to purchase smart TVs.
-
Saccharin is an artificial sweetener that is used in diet beverages. In order for it to be metabolized by the body, it must pass into cells. Below are shown the two forms of saccharin. Saccharin has...
-
If a graph is composed of two cycles joined only at a single vertex \(p\), then no Hamilton path can be formed starting or ending at any vertex that is adjacent to \(p\). a. True b. False
-
Any graph that has exactly two vertices of odd degree has a Hamilton path. a. True b. False
-
If a sequence of vertices represents a Hamilton path, the number of vertices listed should be _______________ the number of vertices in the whole graph. Fill in the blank with the same as or...
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App