Vafeas Inc

question 55

Multiple Choice

Vafeas Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.60, and its tax rate is 35%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. The risk-free rate is 5.0% and the market risk premium is 6.0%. By how much would the capital structure shift change the firm's cost of equity?

• A) -5.20%
• B) -5.78%
• C) -6.36%
• D) -6.99%
• E) -7.69%

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Definitions:

CA

A term often used to abbreviate cancer or carcinoma, indicating a variety of diseases characterized by the uncontrolled division of abnormal cells.

Meaning

The significance or understanding conveyed by a word, phrase, sentence, or text.

Lymphangiosarcoma

A rare and aggressive form of cancer that develops from the lymphatic system, often associated with chronic lymphedema.

Combining Form

A linguistic element used in the construction of medical and scientific terminology that generally consists of a root and a vowel to ease pronunciation when combined with another form.