LeCompte Learning Solutions Is Considering Making a Change to Its

question 12

Multiple Choice

LeCompte Learning Solutions is considering making a change to its capital structure in hopes of increasing its value.The company's capital structure consists of debt and common stock.In order to estimate the cost of debt, the company has produced the following table: $$\begin{array} { c c c c c } \begin{array} { c } \text { Percent financed } \\\text { with debt } \left( \mathrm { wd } _ { \mathrm { d } } \right) \end{array} & \begin{array} { c } \text { Percent financed } \\\text { with equity } \left( \mathrm { w } _ { \mathrm { S } } \right) \end{array} & \begin{array} { c } \text { Debt-to-equity } \\\text { ratio } = \mathrm { w } _ { \mathrm { d } } / \mathrm { w } _ { \mathrm { S } } = ( \mathrm { D } / \mathrm { S } ) \end{array} & \begin{array} { c } \text { B ond } \\\text { Rating }\end{array} & \begin{array} { c } \text { Before-tax } \\\text { cost of debt }\end{array} \\\hline 0.10 & 0.90 & 0.10 / 0.90 = 0.11 & \text { AAA } & 7.0 \% \\0.20 & 0.80 & 0.20 / 0.80 = 0.25 & \text { AA } & 7.2 \\0.30 & 0.70 & 0.30 / 0.70 = 0.43 & \mathrm {~A} & 8.0 \\0.40 & 0.60 & 0.40 / 0.60 = 0.67 & \mathrm { BBB } & 8.8 \\0.50 & 0.50 & 0.50 / 0.50 = 1.00 & \mathrm { BB } & 9.6\end{array}$$ The company uses the CAPM to estimate its cost of common equity, r_s.The risk-free rate is 5% and the market risk premium is 6%.LeCompte estimates that if it had no debt its beta would be 1.0.(Its "unlevered beta," b_U, equals 1.0.) The company's tax rate, T, is 25%. On the basis of this information, what is LeCompte's optimal capital structure, and what is the firm's cost of capital at this optimal capital structure?

• A) w_s = 0.9; w_d = 0.1; WACC = 11.73%
• B) w_s = 0.8; w_d = 0.2; WACC = 10.78%
• C) w_s = 0.7; w_d = 0.3; WACC = 9.11%
• D) w_s = 0.6; w_d = 0.4; WACC = 9.50%
• E) w_s = 0.5; w_d = 0.5; WACC = 11.37%

---

Definitions:

Norbert Elias

A German sociologist known for his work on the theory of civilizing processes, exploring the development of manners, social behavior, and the state's role.

Macro-Level Issues

Social problems and phenomena that affect large parts of societies or entire societies, exploring broad patterns and structures.

Micro-Level Issues

Concerns and problems that pertain to the individual or small groups within the society, focusing on personal and interpersonal dynamics.

Use of Handkerchiefs

The application of a square piece of fabric, traditionally used for personal hygiene purposes, such as wiping the nose or face, but also serving as a functional accessory with various social and cultural significances.