# Determining Optimal Capital Structure

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Determining Optimal Structure

SBC Corp. Has capital structure of 30% debt and 70% equity. The firm current Beta is 1.25, but management wants to understand SBC market risk without effect of leverage. If SBC corp. has a 45% tax rate, what is the unlevered beta.,

A. 0.86

B. 0.96

C. 1.11

D. 1.01

DOM company has current capital structure of 30% debt 70% equity. Current before tax cost of debt is 10% and its tax rate is 45% . Currently has a levered beta of 1.25. The risk free rate is 3.5% and the risk premium on the market is 7.5%

DOM is considering changing its capital structure to 60% debt and 40% equity. Increasing the firms level of debt will cause its before tax cost of debt to increase to 12%. Use the Hamada equation to unlever and relever the beta for the new level of debt. What will the firms WACC be if it makes the change in its capital structure.

a. 6.5%

b. 7.6%

c.8.7%

d.10.9%

Which Capital Structure is the Optimal Capital Structure

Debt ratio-30% equity 70% EPS 1.25 DPS 0.55 Stock price 36.25

Debt ratio -40% equity 60% EPS 1.40 DPS 0.60 stock price 37.75

Debt ratio -50% equity 50% EPS 1.60 DPS 0.65 stock price 39.50

Debt ratio- 60% equity 40% EPS 1.85 DPS 0.75 Stock price 38.75

Debt ratio 70% equity 30% EPS 1.75 DPS 0.70 stock price 38.25

a. Debt Ration = 50% Equity Ratio = 50%

b. Debt Ratio= 40% equity Ratio= 60%

c. Debt Ratio= 70% Equity Ratio= 30%

d. Debt Ratio= 30% Equity Ratio= 70%

e. Debt Ratio= 60% Equity Ratio= 40%

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##### Solution Summary

The expert determines the optimal capital structures. The effect of leverage for a market risk is provided.

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Hi,

Get the answer with the attachment.

Answer:

Given that,

Debt =30%

Equity=70%

Current beta (levered beta) =1.25

Tax rate =45%

Therefore,

Unlevered beta=1.25/(1+((1-45%)*(30%)/(70%)) )=1.01

Given that,

Current ...

###### Education

- MBA, Indian Institute of Finance
- Bsc, Madras University

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