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%

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Definitions:

Fluorine

A highly reactive, pale yellow gas at room temperature, being the most electronegative and reactive of all the elements.

Francium

A highly radioactive metal with the atomic symbol Fr, the least stable and most rare naturally occurring element in the periodic table.

Conduct

To transmit or facilitate the transfer of something such as electricity or heat.

Atoms

The basic units of matter composed of a nucleus surrounded by electrons, representing the smallest component of an element that retains its chemical properties.