Vafeas Inc

question 33

Multiple Choice

Vafeas Inc.'s capital structure consists of 80% debt and 20% common equity, and it has a beta of 1.60, and its tax rate of 35%. However, the CFO thinks the company has too much debt, and he is considering moving to a capital structure with 40% debt and 60% equity. 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) -5.20%
• B) -5.78%
• C) -6.36%
• D) -6.99%

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