Review the following situation:
Transworld Consortium Corp. is trying to identify its optimal capital structure. Transworld Consortium Corp. has gathered the following financial information to help with the analysis.
Debt Ratio (%) | Equity Ratio (%) | EPS | DPS | Stock Price |
---|---|---|---|---|
30 | 70 | 1.55 | 0.34 | 22.35 |
40 | 60 | 1.67 | 0.45 | 24.56 |
50 | 50 | 1.72 | 0.51 | 25.78 |
60 | 40 | 1.78 | 0.57 | 27.75 |
70 | 30 | 1.84 | 0.62 | 26.42 |
Which capital structure shown in the preceding table is Transworld Consortium Corp.’s optimal capital structure?
Debt ratio = 50%; equity ratio = 50%
Debt ratio = 60%; equity ratio = 40%
Debt ratio = 40%; equity ratio = 60%
Debt ratio = 70%; equity ratio = 30%
Debt ratio = 30%; equity ratio = 70%
Consider this case:
Globex Corp. currently has a capital structure consisting of 40% debt and 60% equity. However, Globex Corp.’s CFO has suggested that the firm increase its debt ratio to 50%. The current risk-free rate is 3%, the market risk premium is 8%, and Globex Corp.’s beta is 1.10.
If the firm’s tax rate is 45%, what will be the beta of an all-equity firm if its operations were exactly the same? (0.8, 0.72, 0.92, 0.64)
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