Simon Software Co

question 6

Multiple Choice

Simon Software Co. is trying to estimate its optimal capital structure. Right now, Simon has a capital structure that consists of 20 percent debt and 80 percent equity, based on market values. (Its D/S ratio is 0.25.) The risk-free rate is 6 percent and the market risk premium, rM - rRF, is 5 percent. Currently the company's cost of equity, which is based on the CAPM, is 12 percent and its tax rate is 40 percent. What would be Simon's estimated cost of equity if it were to change its capital structure to 50 percent debt and 50 percent equity?

• A) 14.35%
• B) 30.00%
• C) 14.72%
• D) 15.60%
• E) 13.64%

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Definitions:

Anxiety

A feeling of worry, nervousness, or unease typically about an imminent event or something with an uncertain outcome.

Construct Systems

A psychological framework developed by an individual to make sense of the world, experiences, and relationships.

Psychological Problems

Mental health issues or disorders that affect an individual’s thinking, feeling, behavior, and functioning.

Irrational Logic

An oxymoronic phrase suggesting a form of reasoning that does not follow the principles of logical coherence, often driven by emotion or cognitive biases.