Aaron Athletics Is Trying to Determine Its Optimal Capital Structure

question 67

Multiple Choice

Aaron Athletics is trying to determine its optimal capital structure.The company's capital structure consists of debt and common stock.In order to estimate the cost of debt, the company has produced the following table: The company uses the CAPM to estimate its cost of common equity, rs.The risk-free rate is 5% and the market risk premium is 6%.Aaron estimates that if it had no debt its beta would be 1.0.(Its "unlevered beta," bU, equals 1.0.) On the basis of this information, what is the company's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure?

• A)wc = 0.9; wd = 0.1; WACC = 14.96%
• B)wc = 0.8; wd = 0.2; WACC = 10.96%
• C)wc = 0.7; wd = 0.3; WACC = 7.83%
• D)wc = 0.6; wd = 0.4; WACC = 10.15%
• E)wc = 0.5; wd = 0.5; WACC = 10.18%

Calculate and analyze firm profitability under different economic conditions.

Utilize the North American Industry Classification System (NAICS) codes for industry analysis.

Evaluate industry performance using return on equity (ROE) and other financial metrics.

Understand investment strategies related to the industry life cycle stages.

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