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U.S. Robotics Inc. has a current capital structure of 30% debt and 70% equity. Its current before-tax cost of debt is 6%, and its tax rate is 40%. It currently has a levered beta of 1.15. The risk-free rate is 2.5%, and the risk premium on the market is 8%.

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 8%. 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.)

Which of the following statements regarding a firm’s optimal capital structure are true?

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The optimal capital structure maximizes the firm’s EPS.

The optimal capital structure minimizes the firm’s cost of equity.

The optimal capital structure maximizes the firm’s stock price.

The optimal capital structure minimizes the firm’s cost of debt.

The optimal capital structure minimizes the firm’s WACC.

 
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