Consider this case:

Globo$-$Chem Co$.$ currently has a capital structure consisting of $35\%$ debt and $65\%$ equity. However, Globo$-$Chem Co$.\text{'}$s CFO has

suggested that the firm increase its debt ratio to $50\%.$ The current risk$-$free rate is $3\%,$ the market risk premium is $7\mathrm{.}5\%,$ and Globo$-$

Chem Co$.\text{'}$s beta is $1\mathrm{.}25.$

If the firm's tax rate is $35\%,$ 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 $8\%,$ and its tax rate

is $35\%.$ It currently has a levered beta of $1\mathrm{.}25.$ The risk$-$free rate is $3\%,$ and the risk premium on the market is $7\mathrm{.}5\%.$

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 $10\%.$ 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? $($Hint: Do not round intermediate calculations.$)$

The optimal capital structure is the one that

the WACC and

the firm's stock price. Higher debt levels

$\_$ the firm's risk. Consequently, higher levels of debt cause the firm's cost of equity to