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:

Accrued Interest

The interest that has accumulated on a bond since the last interest payment up to, but not including, the purchase (or sale) settlement date.

Interest Days

The number of days over which interest is calculated on a loan or financial instrument.

Coupon Bond

A type of bond that pays the holder interest at a fixed rate, typically semi-annually, until maturity when the face value is repaid.

Ask Price

The lowest price at which a seller is willing to sell a financial asset, commodity, or currency in the market at a particular time.