Lauterbach Corporation Uses No Debt, and Has a Beta of 1.10

question 51

Multiple Choice

Lauterbach Corporation uses no debt, and has a beta of 1.10, and its tax rate of 40%. 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%

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Definitions:

Impulses

Sudden, involuntary urges to perform actions, often without premeditation, reflecting a desire or emotion.

Suppressed

Refers to forcibly putting an end to something, such as emotions, thoughts, or actions, preventing their expression or acknowledgment.

Personality Type

A personality type is a classification of individuals based on their characteristic patterns of thought, emotion, and behavior.

Pleasure-seeking

Behavior aimed at achieving gratification or enjoyment, often through immediate and sensory experiences.