Mind lap-Cengage Lea × (- O ng e gage costato ntul in etm? bldi6076748rtN deld»

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Mind lap-Cengage Lea × (- O ng e gage costato ntul in etm? bldi6076748rtN deld» 222524532&eN-9781305635975; &parentid-222525022; Find on page Based on your understanding of the capital structun No resultsOptions Debt ratio-50%; equity ratio 50% Consider this case: Globo-Chem Co. is an all-equity firm, and it has a beta of 1 . It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 10%, and it will face a tax rate of 35%. what will Globo-Chem Co.'s beta be if it decides to make this change in its capital structure?1.35 1.22 1.28 1.35 1.49 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 10%, and its tax rate is 35%. It currently has a levered beta of 1.15. The risk-free rate is 2.5%, and the risk premium on the market is 7.5%. U.S. Robotics Inc. is considering changing its capital structure to 60% debt and Type here to search

Explanation / Answer

Option A

Unlevered beta=1

tax rate=35%

Debt/Equity=35/65=0.538462

Levered beta=unlevered beta*(1+(1-tax rate)*Debt/Equity)

=1*(1+(1-35%)*0.538462)

=1.35

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