Cartwright Communications Is Considering Making a Change to Its Capital

question 52

Multiple Choice

Cartwright Communications is considering making a change to its capital structure to reduce its cost of capital and increase firm value.Right now, Cartwright has a capital structure that consists of 20% debt and 80% equity, based on market values.(Its D/S ratio is 0.25.) The risk-free rate is 6% and the market risk premium, r_M − r_RF, is 5%.Currently the company's cost of equity, which is based on the CAPM, is 12% and its tax rate is 25%.What would be Cartwright's estimated cost of equity if it were to change its capital structure to 50% debt and 50% equity?

• A) 13.00%
• B) 13.65%
• C) 14.84%
• D) 15.58%
• E) 16.00%

---

Definitions:

Brain Edema

Swelling in the brain caused by an accumulation of fluid.

Intracranial Pressure

The pressure within the skull that results from the brain tissue, cerebrospinal fluid, and blood, important in maintaining brain health but potentially dangerous if elevated.

Anesthesiologist

A medical specialist focused on administering drugs to provide pain relief and maintenance of consciousness during surgical procedures.

Combining Form

A form used in the construction of medical and scientific terminology to connect two word elements.