Understanding the optimal capital structure Review this situation: Transworld Consortium Corp. is trying to identify its

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Understanding the optimal capital structure
Review this situation: Transworld Consortium Corp. is trying toidentify its optimal capital structure. Transworld Consortium Corp.has gathered the following financial information to help with theanalysis.
Debt Ratio
Equity Ratio
rdrd
rsrs
WACC
Which capital structure shown in the preceding table isTransworld Consortium Corp.’s optimal capital structure?
Debt ratio = 70%; equity ratio = 30%
Debt ratio = 30%; equity ratio = 70%
Debt ratio = 50%; equity ratio = 50%
Debt ratio = 60%; equity ratio = 40%
Debt ratio = 40%; equity ratio = 60%
Consider this case:
Globex Corp. currently has a capital structure consisting of 30%debt and 70% equity. However, Globex Corp.’s CFO has suggested thatthe firm increase its debt ratio to 50%. The current risk-free rateis 3%, the market risk premium is 8%, and Globex Corp.’s beta is1.15.
If the firm’s tax rate is 25%, what will be the beta of anall-equity firm if its operations were exactly thesame?
Now consider the case of another company:
US Robotics Inc. has a current capital structure of 30% debt and70% equity. Its current before-tax cost of debt is 10%, and its taxrate is 25%. It currently has a levered beta of 1.15. The risk-freerate is 3%, and the risk premium on the market is 8%. US RoboticsInc. is considering changing its capital structure to 60% debt and40% equity. Increasing the firm’s level of debt will cause itsbefore-tax cost of debt to increase to 12%.
First, solve for US Robotics Inc.’s unlevered beta.
Use US Robotics Inc.’s unlevered beta to solve for the firm’slevered beta with the new capital structure.
Use US Robotics Inc.’s levered beta under the new capitalstructure, to solve for its cost of equity under the new capitalstructure.
What will the firm’s weighted average cost of capital (WACC) beif it makes this change in its capital structure?
8.75%
11.88%
12.50%
10.00%