Reference no: EM132579359

Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis.

Debt Ratio     Equity Ratio           EPS         DPS           Stock Price

30%             70%                    1.25         0.55            36.25

40%               60%                     1.40        0.60          37.75

50%               50%                     1.60          0.65         39.50

60%                40%                      1.85          0.75       38.75

70%                30%                        1.75         0.70           38.25

Question 1: Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure?

Debt ratio = 40%; equity ratio = 60%

Debt ratio = 70%; equity ratio = 30%

Debt ratio = 50%; equity ratio = 50%

Debt ratio = 30%; equity ratio = 70%

Debt ratio = 60%; equity ratio = 40%

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 8%, and it will face a tax rate of 40%.

Question 2: What will Globo-Chem Co.'s beta be if it decides to make this change in its capital structure?