$13$: Assignment $-$ Capital Structure and Leverage

Globex Corp. has a capital structure that consists of $40\%$ debt and $60\%$ equity. The firm's current beta is $1\mathrm{.}10,$ but management wants

to understand Globex Corp.$\text{'}$s market risk without the effect of leverage.

If Globex Corp. has a $25\%$ tax rate, what is its unlevered beta?

$0\mathrm{.}77$

$0\mathrm{.}88$

$0\mathrm{.}73$

$0\mathrm{.}80$

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 $25\%.$ It currently has a levered beta of $1\mathrm{.}10.$ The risk$-$free rate is $2\mathrm{.}5\%,$ and the risk premium on the market is $7\mathrm{.}5\%.$ 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.$\text{'}$s unlevered beta.

Use US Robotics Inc.$\text{'}$s unlevered beta to solve for the firm's levered beta with the new capital structure.

Use US Robotics Inc.$\text{'}$s levered beta under the new capital structure, to solve for its cost of equity under the new capital structure.

$13$: Assignment $-$ Capital Structure and Leverage

Globex Corp. has a capital structure that consists of $40\%$ debt and $60\%$ equity. The firm's current beta is $1\mathrm{.}10,$ but management wants

to understand Globex Corp.$\text{'}$s market risk without the effect of leverage.

If Globex Corp. has a $25\%$ tax rate, what is its unlevered beta?

$0\mathrm{.}77$

$0\mathrm{.}88$

$0\mathrm{.}73$

$0\mathrm{.}80$

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 $25\%.$ It currently has a levered beta of $1\mathrm{.}10.$ The risk$-$free rate is $2\mathrm{.}5\%,$ and the risk premium on the market is $7\mathrm{.}5\%.$ 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.$\text{'}$s unlevered beta.

Use US Robotics Inc.$\text{'}$s unlevered beta to solve for the firm's levered beta with the new capital structure.

Use US Robotics Inc.$\text{'}$s levered beta under the new capital structure, to solve for its cost of equity under the new capital structure.