US. Traders Inc. has a current capital structure of 30% debt and 70% equity. Its...
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US. Traders 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 25%. 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%. US Traders Inc. 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%.
First, solve for US Traders Inc.s unlevered beta.
Use US Robotics Inc.s unlevered beta to solve for the firms levered beta with the new capital structure.
Use US Robotics Inc.s levered beta under the new capital structure, to solve for its cost of equity under the new capital structure.
What will the firms weighted average cost of capital (WACC) be if it makes this change in its capital structure?
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