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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 1.10. the risk free are is 2.5% and the risk premium on the market is 8%. U.s. Robotics Inc. is considering changing its capital structue to 60% debt and 40% equity. Inceasing the firms level of debt will cause its before tax cost of debt to increase to 12%.

1.What is Robotics unlevered beta?

2. Reiever U.S. Robotics beta using the firm's new captial structure.

3. Use Robotics levered beta under the new capital structure to solve for its cost of equity under the new capital struature.

4. What will the firms WACC be if it makes the changes in the capital structure?

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Collen Von
Collen VonLv2
28 Sep 2019
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LeCompte Learning Solutions is considering making a change to its capital structure in hopes of increasing its value. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table:

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0.30 0.70 0.30/0.70 = 0.43 A 8.0

0.40 0.60 0.40/0.60 = 0.67 BBB 8.8

0.50 0.50 0.50/0.50 = 1.00 BB 9.6

The company uses the CAPM to estimate its cost of common equity, rs. The risk-free rate is 5% and the market risk premium is 6%. LeCompte estimates that if it had no debt its beta would be 1.0. (Its "unlevered beta," bU, equals 1.0.) The company's tax rate, T, is 40%. On the basis of this information, what is LeCompte's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure? (the lowest WACC)

LeCompte Learning Solutions is considering making a change to its capital structure in hopes of increasing its value. The company's capital structure consists of debt and common stock. In order to estimate the cost of debt, the company has produced the following table:

Percent financed Percent financed Debt-to-equity Bond Before-tax

with debt (wd) with equity (ws) ratio (D/S) Rating cost of debt

0.10 0.90 0.10/0.90 = 0.11 AAA 7.0%

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0.40 0.60 0.40/0.60 = 0.67 BBB 8.8

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