Morales Publishing's Tax Rate Is 40%,its Beta Is 1

question 48

Multiple Choice

Morales Publishing's tax rate is 40%,its beta is 1.10,and it uses no debt.However,the CFO is considering moving to a capital structure with 30% debt and 70% equity.If 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) 1.53%
• B) 1.70%
• C) 1.87%
• D) 2.05%
• E) 2.26%

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Definitions:

Recording Transactions

The systematic process of documenting financial transactions in the accounting records of a business.

Accounting System

The methods and procedures used by a business to collect, classify, summarize, and report financial data for use by management and external users.

Voucher

A document representing an internal intent to make a payment to an external entity, detailing the specifics of the transaction.

Liability

A financial obligation or amount owed by a business to others, such as loans, accounts payable, or mortgages.