Question

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% 7096 1.25 0.55 36.25 6096 1.40 0.60 37.75 50% 1.60 0.65 39.50 40% 1.85 0.75 38.75 30% 1.75 0.70 38.25 Which capital structure shown in the preceding table is Universal Exports Inc. 's optimal capital structure? O Debt ratio-40%; equity ratio-6096 O Debt ratio-60%; equity ratio-40% O Debt ratio-30%; equity ratio-70% @) Debt ratio-50%; equity ratio-50% O Debt ratio-70%; equity ratio-30% 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 60% equity and 40% debt. The firm's cost of debt will be 10%, and it will face a tax rate of 35%. What will Globex Corp.'s beta be if it decides to make this change in its capital structure?

Answer 1

1.

Debt ratio=50%, Equity ratio=50%

2.

=1*(1+(1-35%)*40%/60%)=1.433

3.

=12%*(1-35%)*60%+40%*(3%+7.5%*1.25/(1+(1-35%)*30%/70%)*(1+(1-35%)*60%/40%))=11.6725%

4.

Option B,E